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Full text of "General oversight of the U.S. Postal Service : hearings before the Subcommittee on the Postal Service of the Committee on Government Reform and Oversight, House of Representatives, One Hundred Fourth Congress, first session, February 23; March 2 and 8; May 23; and June 7, 14, and 28, 1995"

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Y4.G  74/7 :0V  2/8 

general  Oversight  of  the  U.S.  Posta. . . 









FEBRUARY  23;  MARCH  2  AND  8;  MAY  23;  AND  JUNE  7,  14,  AND  28,  1995 

Printed  for  the  use  of  the  Committee  on  Government  Reform  and  Oversight 











FEBRUARY  23;  MARCH  2  AND  8;  MAY  23;  AND  JUNE  7,  14,  AND  28,  1995 

Printed  for  the  use  of  the  Committee  on  Government  Reform  and  Oversight 

88-695  CC  WASHINGTON  :  1997 

For  sale  by  the  U.S.  Government  Printing  Office 
Superintendent  of  Documents,  Congressional  Sales  Office,  Washington,  DC  20402 
ISBN  0-16-054366-5 

WILLIAM  F.  CLINGER.  Jr.,  Pennsylvania.  Chairman 


DAN  BURTON,  Indiana 




STEVEN  SCHIFF,  New  Mexico 


WILLIAM  H.  ZELIFF,  Jr.,  New  Hampshire 

JOHN  M.  McHUGH,  New  York 


JOHN  L.  MICA,  Florida 

PETER  BLUTE,  Massachusetts 

THOMAS  M.  DAVIS,  Virginia 

DAVID  M.  MCINTOSH,  Indiana 

JON  D.  FOX,  Pennsylvania 

RANDY  TATE,  Washington 

DICK  CHRYSLER,  Michigan 

GIL  GUTKNECHT,  Minnesota 
MARK  E.  SOUDER,  Indiana 
WILLLyvi  J.  MARTINI,  New  Jersey 
JOHN  B.  SHADEGG,  Arizona 
CHARLES  F.  BASS,  New  Hampshire 

ROBERT  L.  EHRLICH,  Jr.,  Maryland 

HENRY  A.  WAXMAN,  California 
TOM  LANTOS,  California 
ROBERT  E.  WISE,  Jr.,  West  Virginia 
MAJOR  R.  OWENS,  New  York 
JOHN  M.  SPRATT,  Jr.,  South  CaroUna 

LOUISE  Mcintosh  slaughter  New 

PAUL  E.  KANJORSKI,  Pennsylvania 
GARY  A.  CONDIT,  CaUfomia 
COLLIN  C.  PETERSON,  Minnesota 
KAREN  L.  THURMAN,  Florida 
THOMAS  M.  BARRETT,  Wisconsin 
GENE  TAYLOR,  Mississippi 

JAMES  P.  MORAN,  Virginia 
GENE  GREEN,  Texas 
CARRIE  P.  MEEK,  Florida 
FRANK  MASCARA,  Pennsylvania 
CHAKA  FATTAH,  Pennsylvania 
BILL  BREWSTER,  Oklahoma 
TIM  HOLDEN,  Pennsylvania 



James  L.  Clarke,  Staff  Director 

Kevin  Sabo,  General  Counsel 

Judith  McCoy,  Chief  Clerk 

Bud  Myers,  Minority  Staff  Director 

Subcommittee  on  the  Postal  Service 

JOHN  M.  McHUGH,  New  York,  Chairman 

MAJOR  R.  OWENS,  New  York 


DAVID  M.  Mcintosh,  Indiana 
ROBERT  L.  EHRLICH,  Jr.,  Maryland 

GENE  GREEN,  Texas 
CARRIE  P.  MEEK,  Florida 

Ex  Officio 

WILLIAM  F.  CLINGER,  Jr.,  Pennsylvania  CARDISS  COLLINS,  Illinois 

Dan  Blair,  Staff  Director 

Robert  Taub,  Professional  Staff  Member 

Heea  Fales,  Professional  Staff  Member 

Jane  Hatcherson,  Professional  Staff  Member 

Meryl  Cooper,  Clerk 

Denise  Wilson,  Minority  Professional  Staff 



Hearing  held  on: 

February  23,  1995  1 

March  2,  1995  71 

March  8,  1995  215 

May  23,  1995 259 

June  7,  1995  367 

June  14,  1995  457 

June  28,  1995  631 

Statement  of: 

Campbell,  James  I.,  Jr.,  counsel  to  Federal  Express  Corp.;  Harry  L. 
Geller,  president.  Global  Mail,  on  behalf  of  the  Air  Courier  Conference 
of  America;  Peter  N.  Hiebert,  Winston  &  Strawn,  counsel  to  DHL 
Airways,   Inc.;   and  James  A.   Rogers,   vice  president.   United   Parcel 

Service,  accompanied  by  Kurt  Pfotenhauer  and  Don  Spulber  547 

DeSio,  Anthony  W.,  president  and  CEO,  Mail  Boxes,  Etc.;  Robert  Muma, 
chairman.  Postal  Affairs  Committee,  Envelope  Manufacturers  Associa- 
tion of  America;  Donald  L.  Harle,  vice  chairman.  Mail  Advertising 
Service  Association;  Randall  Holleschau,  director.  National  Association 
of  Presort  Mailers,  accompanied  by  Dennis  Macharg;  and  John  V. 
Maraney,  executive  director.  National  Star  Route  Mail  Contractors  As- 
sociation, accompanied  by  R.B.  Matheson  and  M.  Sodrel  460 

Games,  W.  David,  president,  National  Association  of  Postmasters  of  the 
United  States;  Vincent  Palladino,  president,  National  Association  of 
Postal  Supervisors;  and  Bill  Brennan,  president.  National  League  of 

Postmasters  415 

Gelfer,  George  G.,  president  and  general  manager,  Francotyp-Postalia, 
Inc.;  Michael  A.  Allocca,  president  and  chief  executive  officer,  ASCOM 
Hasler  Mailing  Systems,  Inc.;  Neal  Mahlstedt,  president,  Friden 
Neopost;  and  Kathleen  E.  S3mnott,  vice  president,  Worldwide  Market- 
ing, Pitney  Bowes,  Inc  516 

Gleiman,  Edward  J.,  chairman,  Postal  Rate  Commission,  accompanied 
by  W.H.  "Trey"  LeBlanc,  vice  chairman.  Postal  Rate  Commission; 
George  W.  Haley,  commissioner.  Postal  Rate  Commission;  Edward 
Quick,  Jr.,  commissioner,  Postal  Rate  Commission;  Wayne  A.  Schley, 

commissioner.  Postal  Rate  Commission  74 

Kline,  Alan,  vice  president.  Alliance  of  Nonprofit  Mailers,  accompanied 
by  Neal  Denton,  executive  director;  and  Lee  Cassidy,  executive  director, 

National  Federation  of  Nonprofits 344 

Motley,  Michael  E.,  Associate  Director,  Government  Business  Operations 
Issues,  General  Government  Division,  U.S.  General  Accounting  Office, 
accompanied  by  James  T.  Campbell,  Assistant  Director,  General  Gov- 
ernment Division 52 

Runyon,  Marvin,  Postmaster  General  and  Chief  Executive  Officer,  U.S. 
Postal  Service,  accompanied  by  Mike  Coughlin,  Deputy  Postmaster 
General;  and  Bill  Henderson,  chief  operating  officer  and  executive  vice 

president 5,  634 

Rush,  Tonda,  president,  National  Newspaper  Association;  Cathleen  P. 
Black,  president  and  CEO,  Newspaper  Association  of  America;  George 
Gross,  executive  vice  president,  Magazine  Publishers  of  America;  Steve 
Bair,  senior  vice  president.  Law  and  Business  Affairs,  Time  Life,  Inc., 
on  behalf  of  the  Association  of  American  Publishers  316 



Statement  of— Continued  *^ 

Sackler,  Arthur  B..  managing  director,  the  Mailers  Council;  Ian  D 
Volner,  Esq  general  counsef,  Advertising  Mail  Marketing  Association' 
accompanied  by  Gene  Del  Polito,  executive  director;  Richard  Barton 
senior  vice  president,  congressional  relations,  Direct  Marketing  Asso- 
ciation; David  C.  Todd  Esq.,  Patton,  Boggs  &  Blow,  and  counsfl,  MaH 
Order  Association  of  America;  and  Timothy  May,  Patton  Boees  & 
Blow,  and  general  counsel,  Parcel  Shippers  Association  2fi1 

Tttt  r^^?^  V"/^"^i,?r^^'^^"^'  National  Association  of  Letter  Carriers' 
A^-r  n  S'  w*?f-  ^'"^''■-  P'"esident,  American  Postal  Workers  Union 
Abl^CiU;  William  Quinn,  president.  National  Postal  Mail  Handlers 
Union,  LIUNA.  AFL-CIO;  and  Scottie  Hicks,  president.  National  Rural 

Letter  Carriers  Association  o^q 

Winters,  Sam,  chairman.  Board  of  Governors,  u's/Postai'Service 91S 

Letters,  statements,  etc.,  submitted  for  the  record  by:  

Allocca,  Michael  A.,  president  and  chief  executive  ofTicer,  ASCOM  Hasler 

Mailing  Systems,  Inc.,  response  to  written  questions  527 

Alyarado,  Susan,  information  concerning  the  Chicago  Performance" (C'lus- 

ter  Service  Improvement  Plan  254 

Bair,  Steve    senior  vice  president.  Law  and 'Business 'Affairs,' Time  "Life 
inc     on  behalf  of  the  Association  of  American  Publishers,  prepared 

st3,tGmGnt  oi  QQct 

Barton,   Richard,   senior  vice  president,  congre'ssionai'''reiations' "Direct 
Marketing  Association:  ,       xcv.l 

Prepared  statement  of 285 

Response  to  written  questions 289 

Biller,  Moe,  president,  American  Postal  Workers'uiiion  'af'lI'CIO' 

Prepared  statement  of '  304 

Response  to  written  questions " 3gg 

Black,  Cathleen  P.,  president  and  CEO,  Newspaper' 'Ass'o'cia't'i'o'n" of  Am'er- 

Prepared  statement  of 325 

Response  to  written  questions 328 

Brennan,  Bill,  president,  National  League  of  Postmasters" 

Prepared  statement  of 43g 

Response  to  written  questions '..' 439 

Burns,  James  A.,  president,  Postal  Managers  of  America '(PMA)',' 'prepared 

statement  of ^    ^  .en 

Campbell,  James  I.,  Jr.,  counsel  to  Federai"Express"Corp  • 

Prepared  statement  of 549 

Response  to  written  questions ' 552 

Cassidy,  Lee,  executive  director.  National  Federatron'of  Nonprofits ' 

Prepared  statement  of 353 

Response  to  written  questions ^..."^ 355 

^°¥?f'  ?°"-  ^^''bara  Rose,  a  Representat'ive'iii''Coiigress  from'the'sta'te 

ot  Michigan,  prepared  statements  of 209  260  388 

Collins,  Hon.  Cardiss,  a  Representative  in  Congress  from  "tlie" State  of  ' 

Illinois,  prepared  statements  of 51,  214,  248,  449,  696 

DeSio,  Anthony  W.,  president  and  CEO,  Mail  Boxes,  Etc  • 

Prepared  statement  of 4g2 

Response  to  written  questions .., 4g3 

Engebretson,  Gary  D.,  president,  Contract  Services  Association"of"AiTi'er- 

ica,  prepared  statement  of g28 

Games,  W^  David,  president,  National  Association " of "Pos'tiiiaster's'oftiie 
United  States: 

Prepared  statement  of 417 

Response  to  written  questions ""!....."!!"...".""!!.."."!!..  421 

Gelfer,  George  G.,  president  and  general  manager,  Francotyp^Postaiia^ 

Prepared  statement  of 519 

Response  to  written  questions 523 

Geller    Harry  L.,  president.  Global  Mail,  on"i)eiiai'f  "o'f  "tJie  "Ai'r"c'o'uiier 
Conference  of  America: 

Prepared  statement  of 5gg 

Response  to  written  questions .."!..."!!!." 574 

Gilman,  Hon    Benjamin  A.,  a  Representative  in  "'Congress  frorn  the  State 
ot  New  York,  prepared  statements  of 316  449  695 



Letters,  statements,  etc.,  submitted  for  the  record  by — Continued 

Gleiman,  Edward  J.,  chairman.  Postal  Rate  Commission: 

Prepared  statement  of 78 

Response  to  written  questions 89 

Green,  Hon.  Gene,  a  Representative  in  Congress  from  the  State  of  Texas, 

prepared  statements  of 52,  210,  217,  633 

Gross,  George,  executive  vice  president,  Magazine  PubUshers  of  America: 

Prepared  statement  of 333 

Response  to  written  questions 335 

Harle,  Donald  L.,  vice  chairman,  Mail  Advertising  Service  Association: 

Prepared  statement  of 475 

Response  to  written  questions 478 

Hicks,  Scottie,  president.  National  Rural  Letter  Carriers  Association: 

Prepared  statement  of 398 

Response  to  written  questions 400 

Hiebert,  Peter  N.,  Winston  &  Strawn,  counsel  to  DHL  Airways,  Inc.: 

Prepared  statement  of 577 

Response  to  written  questions , 581 

HoUeschau,  Randall,  director.  National  Association  of  Presort  Mailers, 
response  to  written  questions  485 

Kline,  Alan,  vice  president.  Alliance  of  Nonprofit  Mailers: 

Prepared  statement  of 347 

Response  to  written  questions 349 

LeBlanc,   W.H.   'Trey",  vice  chairman.   Postal   Rate  Commission,  joint 
study  entitled,  "Postal  Ratemaking  in  a  Time  of  Change" 126 

Mahlstedt,  Neal,  president,  Friden  Neopost,  response  to  written  ques- 
tions        531 

Maraney,  John  V.,  executive  director.  National  Star  Route  Mail  Contrac- 
tors Association: 

Prepared  statement  of 491 

Response  to  written  questions 494 

May,  Timothy,  Patton,  Boggs  &  Blow,  and  general  counsel,  Parcel  Ship- 
pers Association: 

Prepared  statements  of 297,  507 

Response  to  written  questions 303 

Motley,  Michael  E.,  Associate  Director,  Government  Business  Operations 
Issues,  General  Government  Division,  U.S.  General  Accounting  OfRce: 

Prepared  statement  of 55 

Response  to  written  questions 62 

McHugh,  Hon.  John  M.,  a  Representative  in  Congress  from  the  State 
of  New  York: 

Letter  from  Tirso  Del  Junco  215 

Prepared  statement  of 3 

Muma,  Robert,  chairman,  Postal  Affairs  Committee,  Envelope  Manufac- 
turers Association  of  America: 

Prepared  statement  of 466 

Response  to  written  questions 477 

Owens,  Hon.  Major  R.,  a  Representative  in  Congress  from  the  State 
of  New  York,  prepared  statement  of  634 

Palladino,  Vincent,  president,  National  Association  of  Postal  Supervisors: 

Prepared  statement  of 423 

Response  to  written  questions  ...., 431 

Quinn,  William,  president,  National  Postal  Mail  Handlers  Union,  LIUNA, 

Prepared  statement  of 391 

Response  to  written  questions 394 

Rogers,  James  A.,  vice  president,  United  Parcel  Service: 

Prepared  statement  of 584 

Response  to  written  questions 613 

Runyon,  Marvin,  Postmaster  General  and  Chief  Executive  Officer,  U.S. 
Postal  Service,  responses  to  written  questions 8,  30,  31,  637 

Rush,  Tonda,  president,  National  Newspaper  Association: 

Prepared  statement  of 319 

Response  to  written  questions 321 

Sackler,  Arthur  B.,  managing  director,  the  Mailers  Council: 

Prepared  statement  of 264 

Response  to  written  questions 267 


Letters,  statements,  etc.,  submitted  for  the  recorH  hv__r-«r,f       j  ^^^^ 

Sombrotto,  Vincent    Dre<?iHpnt    MofV    ^^.^^^^  by— Continued 
AFL-CIO:  president,  National  Association  of  Letter  Carriers, 

Prepared  statement  of 

Response  to  written  questions 373 

bynnott,    Kathleen    E..    vice    Dresi'HpnV'''w«^i;i"-J' ■■■;■;■••,• 376 

Bowes,  Inc.:  president.    Worldwide    Marketing,    Pitney 

Prepared  statement  of 

rr    ,  j^esponse  to  written  questions 535 

Prepared  statement  of 

Response  to  written  questions 291 

°fen""  °-  ^"'-  '"""''  -""-':  AdveSsing  Mail  MaSetingAsso;     ^* 
Prepared  statement  of ... 
«r„-^^^P°"^®  ^^  written  questions 270 

Winters,  Sam,  chairman,  Board  of  GovemorsUS  PocV^.iq.:'" '^^l 

nformation  concerning  the  corpoitTlogo  ^°'*^^  ^"^^"•' 

Information  concerning  Express  Mail  245 

Information  concerning  negative  equity 241 

Information  concerning  salient  financials".:: 249 

Prepared  statement  of 232 

Response  to  written  questions 221 

p":taES"staSie\ur""'=*^'"''°"^-''^'"''^^^  ''' 




House  of  Representatives, 
Subcommittee  on  the  Postal  Service, 
Committee  on  Government  Reform  and  Oversight, 

Washington,  DC. 

The  subcommittee  met,  pursuant  to  notice,  at  10:26  a.m.,  in  room 
2247,  Rayburn  House  Office  Building,  Hon.  John  M.  McHugh 
(chairman  of  the  subcommittee)  presiding. 

Present:  Representatives  McHugh,  Sanford,  Oilman,  Shays,  Ehr- 
lich,  and  Barbara-Rose  Collins. 

Staff  present:  Dan  Blair,  staff  director;  Robert  Taub,  Heea  Fales, 
and  Jane  Hatcherson,  professional  staff  members;  Meryl  Cooper, 
clerk;  and  Denise  Wilson,  minority  professional  staff. 

Mr.  McHugh.  I  will  call  this  subcommittee  meeting  to  order.  We 
will  certainly  welcome  the  addition  of  Miss  Collins  when  she  ar- 
rives, but  I  know  that  time  is  a  significant  factor,  and  we  don't 
want  to  impose  upon  the  individuals  who  are  here  today  any  more 
than  we  have  to. 

Today  the  Subcommittee  on  Postal  Service  begins  a  series  of  gen- 
eral oversight  hearings  regarding  the  operation  of  the  U.S.  Postal 
Service.  These  sessions  are  intended  to  provide  the  members  of  the 
subcommittee  with  an  overview  of  the  present  administrative  and 
operational  status  of  the  Nation's  largest  civilian  employer,  the 
U.S.  Postal  Service. 

This  morning  we  are  honored  to  have  before  us  the  Postmaster 
General  of  the  United  States,  Mr.  Marvin  Runyon.  In  addition,  Mr. 
Mike  Motley,  who  is  the  Associate  Director  of  the  General  Account- 
ing Office,  will  also  present  testimony,  and  it  is  my  honor  and 
privilege  to  welcome  both  of  these  gentlemen  here  this  morning — 
thank  you  for  being  here — and  also  to  welcome  each  and  every  one 
of  you. 

Certainly  the  Postal  Service  has  not  lacked  for  media  attention 
these  past  few  months.  Allegations  of  poor  delivery,  unacceptable 
levels  of  service,  and  rate  increases  have  led  to  calls  for  privatiza- 
tion and,  unfortunately,  a  general  lack  of  respect  among  much  of 
the  public  for  an  institution  that  is  literally  as  old  as  the  Republic 

At  the  same  time,  reports  of  more  positive  developments  such  as 
improvements  in  service  standards  and  the  fact  that  our  Postal 
Service,  for  all  of  its  perceived  shortcomings  and  for  all  of  the  chal- 
lenges it  faces  each  and  every  day,  is  still  among  the  least  expen- 


sive  in  the  world.  These  kinds  of  things  seldom  make  the  morning 
headlines.  ^ 

What  many  people  too  often  forget  is  the  breadth  and  the  mag- 
nitude of  the  mandate  for  the  Postal  Service  in  our  country.  While 
we  will  not  attempt  to  gloss  over  past  challenges  and  mistakes,  we 
hope  this  series  of  hearings  will  provide  the  members  of  the  sub- 
committee with  the  information  to  allow  them  to  determine  the 
strengths  and  the  weaknesses  of  the  Postal  Service  and  to  aid  the 
Congress  in  facilitating  a  higher  standard  of  delivery  and  service 
to  all  postal  customers. 

I  look  forward  to  Mr.  Runyon  updating  the  subcommittee  mem- 
bers on  a  wide  range  of  postal  issues.  Particularly,  I  hope  progress 
can  be  reported  to  us  today  on  the  collective  bargaining  front.  I 
know  the  Postmaster  General  has  expressed  his  concerns  regarding 
the  inability  of  labor  and  management  to  reach  collective  bargain- 
ing agreements  in  the  past,  and  we  would  welcome  his  perspective 
on  what  might  be  done  to  ameliorate  this  situation  through  future 

Another  issue  that  certainly  is  of  concern  involves  finances.  With 
the  recent  rate  increase,  the  state  of  postal  fiscal  affairs  should 
look  good  for  the  forthcoming  year.  However,  the  budget  process 
and  a  host  of  other  unforeseen  circumstances  could  adversely  affect 
the  Postal  Service's  breakeven  point,  and  we  are  most  interested  as 
well  in  the  Postmaster  General's  views  on  what  the  future  might 
hold  in  this  regard. 

I  want  to  extend  the  subcommittee's  appreciation  for  the  appear- 
ance of  our  second  witness,  General  Accounting  Office  Associate  Di- 
rector Mike  Motley.  The  GAO  has  performed  admirably  in  works 
with  the  Postal  Service  and  in  the  postal  arena  over  the  past  few 
years,  and  I  along  with  members  of  the  subcommittee  look  forward 
to  GAO's  continuing  cooperation  with  the  Congress  in  its  review 
and  its  analysis  of  postal  operations. 

For  the  record,  today's  meeting  represents  the  first  in  a  series  of 
general  oversight  hearings  to  be  conducted  by  the  subcommittee. 
We  have  asked  the  Postal  Rate  Commission  to  appear  before  us 
next  week,  and  we  have  scheduled  a  March  8  appearance  before 
the  subcommittee  of  the  Postal  Board  of  Governors. 

As  a  legislative  body  devoted  exclusively  to  the  oversight  of  the 
Postal  Service,  this  subcommittee  plans  to  scrutinize  in  depth  vir- 
tually all  phases  of  postal  operations  and  services.  This  will  un- 
doubtedly lead  us  into  areas  of  inquiry  that  have  often  been  totally 
ignored  and  even  rejected  in  the  past.  While  our  dedication  to  prob- 
ing all  areas  of  postal  operations  might  be  unsettling  to  some,  I  be- 
lieve that  it  is  our  solemn  duty  to  the  people  of  this  Nation  to  en- 
sure that  no  legitimate  question  goes  unasked  and  no  valid  argu- 
ment goes  unheard  and  unheeded.  This  has  been  the  unofficial 
motto  of  this  104th  Congress,  and  it  will  be  the  guiding  principle 
of  this  subcommittee. 

With  that,  I  thank  the  witnesses  again  for  their  appearance  here 
today,  and  we  look  forward  to  their  testimony. 
[The  prepared  statement  of  Hon.  John  M.  McHugh  follows:] 

Prepared  Statement  of  Hon.  John  M.  McHugh,  a  Representative  in  Congress 
From  the  State  of  New  York 

Good  morning,  the  subcommittee  will  come  to  order.  Today,  the  Subcommittee  on 
the  Postal  Service  will  begin  its  series  of  general  oversight  hearings  of  the  United 
States  Postal  Service.  This  series  of  hearings  is  intended  to  provide  the  members 
of  the  subcommittee  with  an  overview  of  the  present  state  of  operations  of  the  na- 
tion's largest  civilian  employer.  This  morning,  we  are  honored  to  have  before  us  the 
Postmaster  General  of  the  United  States,  Mr.  Manin  Runyon.  In  addition,  we  have 
Mr.  Mike  Motley,  Associate  Director  of  the  General  Accounting  Office.  It  is  a  pleas- 
ure to  welcome  all  of  you  to  the  hearing  this  morning. 

The  Postal  Service  has  not  lacked  for  media  attention  these  past  few  months. 
Calls  for  privatization,  allegations  of  poor  delivery  and  service,  and  recent  rate  in- 
creases have  led  to  a  lack  of  respect  among  the  general  public  for  an  institution 
which  is  as  old  as  the  republic  itself  However,  good  news  such  as  improvements 
in  service  standards  and  the  fact  that  our  Postal  Service  is  still  among  the  least 
expensive  in  the  world  seldom  makes  the  morning  headlines.  What  many  people 
seem  to  forget  is  the  breadth  and  magnitude  of  the  mandate  for  Postal  Service  in 
our  country.  While  not  attempting  to  gloss  over  past  mistakes,  I  hope  this  series 
of  hearings  will  help  the  subcommittee  determine  the  strengths  and  weaknesses  of 
the  Postal  Service  in  order  to  aid  the  Congress  in  facilitating  delivery  and  service 
to  all  postal  customers. 

I  look  forward  to  Mr.  Runyon  updating  the  subcommittee  members  on  a  wide 
range  of  postal  issues.  I  hope  progress  can  be  reported  on  the  collective  bargaining 
front.  I  know  the  Postmaster  General  has  expressed  his  concerns  regarding  the  in- 
ability of  labor  and  management  to  reach  collective  bargaining  agreements.  Reach- 
ing out  to  a  third  party  arbitrator  can  be  beneficial;  however,  binding  determina- 
tions reached  by  a  party  who  is  unfamiliar  with  the  Postal  Service  and  its  structure 
can  adversely  affect  operating  abilities.  Another  issue  of  concern  involves  finances. 
With  the  recent  rate  increase,  postal  finances  should  look  good  for  the  forthcoming 
year.  However,  the  budget  process  and  other  unforeseen  circumstances  could  ad- 
versely affect  the  Postal  Service's  break  even  point. 

I  want  to  extend  the  subcommittee's  appreciation  for  the  appearance  of  our  second 
witness.  General  Accounting  Office  Associate  Mike  Motley.  The  GAO  has  performed 
admirable  work  in  the  postal  arena  over  the  past  few  years  and  I  look  forward  to 
GAO's  continuing  cooperation  with  the  Congress  and  this  subcommittee  in  its  re- 
view and  analysis  of  postal  operations. 

For  the  record,  today's  meeting  represents  the  first  hearing  in  a  series  of  general 
oversight  hearings  to  be  conducted  by  the  subcommittee.  We  have  asked  the  Postal 
Rate  Commission  to  appear  before  the  subcommittee  next  week  and  we  have  sched- 
uled for  March  8  an  appearance  of  the  Postal  Board  of  Governors  before  the  sub- 
committee. As  a  subcommittee  devoted  exclusively  to  oversight  of  the  Postal  Service, 
we  plan  to  scrutinize  in  depth  all  postal  operations  and  services.  I  thank  the  wit- 
nesses for  their  appearance  and  look  forward  to  their  testimony. 

Mr.  McHuGH.  At  this  time,  I  would  like  to  yield  to  the  Honorable 
Barbara-Rose  Collins,  the  gentlelady  from  Michigan,  who  serves  as 
the  ranking  minority  member  of  the  committee,  for  any  opening  re- 
marks she  might  have. 

Miss  CoUins. 

Miss  Collins  of  Michigan.  Thank  you,  Mr.  Chairman. 

I  join  you  in  welcoming  our  two  panelists  for  the  first  of  a  series 
of  oversight  hearings  on  the  Postal  Service. 

As  the  former  chairwoman  of  the  Committee  on  Post  Office  and 
Civil  Service  Subcommittee  on  Postal  Operations  and  Services,  I 
am  pleased  that  we  are  embarking  on  a  sensible  and  comprehen- 
sive examination  of  postal  services  and  operations.  I  note  that  the 
GAO  report  on  automation  was  in  response  to  my  subcommittee  re- 
quest. Mr.  Runyon  and  Mr.  Motley  are  familiar  with  my  concerns, 
and  my  concerns  have  not  changed. 

I  remain  interested  in  the  state  of  labor-management  relations  at 
the  Postal  Service,  the  status  of  technological  innovations,  the  im- 
pact automation  is  having  on  the  efficient  delivery  and  handling  of 
mail  or  the  inefficient  delivery  and  handling  of  mail,  and,  finally, 

the  overall  state  of  mail  delivery  in  our  cities  and  communities 
across  the  Nation.  In  short,  I,  too,  am  concerned  about  the  future 
of  the  Postal  Service.  To  that  end,  I  look  forward  to  hearing  from 
the  Postmaster  General  and  the  GAO  on  matters  affecting  the  de- 
livery of  mail. 

I  thank  you,  Mr.  Chairman,  for  your  foresight,  your  approach, 
and  dedication  to  a  thorough  airing  of  postal  matters. 

Mr.  McHuGH.  Thank  you.  Miss  Collins. 

Next  I  yield  to  the  vice  chairman  of  the  subcommittee,  the  Hon- 
orable Mark  Sanford,  the  gentleman  from  South  Carolina. 

Mr.  Sanford.  I'll  keep  it  very  brief  and  say  that  I  look  forward 
to  the  testimony,  and  I  really  have  no  opening  comment.  I  think 
you  have  said  everything  that  needs  to  be  said  from  my  end. 

Mr.  McHUGH.  Thank  you  very  much. 

To  his  left,  and  to  your  right,  is  the  honorable  gentleman  from 
New  York.  Not  all  of  us  honorable  gentlemen  are  from  New  York, 
but  he  is,  and  he  is  Mr.  Ben  Gilman. 

Mr.  Gilman.  Thank  you,  Mr.  Chairman,  and.  Chairman  McHugh, 
I  want  to  thank  you  for  calling  this  first  meeting  in  a  series  of 
hearings  to  address  the  issues  that  the  Postal  Service  is  going  to 
have  to  be  confronting  in  the  coming  months  and  years,  and  it  is 
my  hope  that  in  our  subcommittee  we  will  be  able  to  engage  in  a 
constructive  dialog  to  help  improve  the  efficiency  and  customer 
service  of  what  I  consider  an  indispensable  agency.  While  I  under- 
stand that  every  department  of  our  Federal  Government  must  be 
considered  in  our  efforts  to  try  to  control  the  Federal  budget  deficit, 
we  hope  that  as  we  embark  on  those  efforts  we  will  be  keeping 
service,  good  service,  intact  and  that  we  will  be  honoring  the  com- 
mitments we  have  made  to  our  postal  employees. 

I  join  in  welcoming  our  Postmaster  General,  Mr.  Runyon,  and 
Mr.  Michael  Motley  of  the  General  Government  Division  of  the 
General  Accounting  Office  to  our  subcommittee.  I  welcome  also 
Deputy  Postmaster  General  Mike  Coughlin,  who  is  here  with  us, 
and  Bill  Henderson,  the  Chief  Operating  Officer  and  Executive  Vice 

I  also  want  to  welcome  a  number  of  our  postmasters  who  are 
able  to  attend.  They  have  been  here  for  several  days  of  meetings 
in  Washington.  We  look  forward  to  hearing  the  testimony  of  the 
Postmaster  General. 

Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  Thank  you,  Mr.  Gilman. 

Next  I  will  yield  to  the  gentleman  from  Connecticut,  Mr.  Chris 

Mr.  Shays.  Thank  you,  Mr.  Chairman. 

I  just  would  add  my  voice  to  the  appreciation  for  our  holding 
these  hearings  and  to  thank  you,  Mr.  Runyon,  and  your  people  for 
being  here.  I  think  you  have  an  extraordinarily  difficult  task,  and 
I  would  like  to  feel  that  Congress  can  help  you  in  that  effort  rather 
than  being  a  hindrance. 

My  ultimate  hope  is  that  you  can  do  the  job  with  less  people  and 
provide  better  service,  and  I  know  that  you  won't  be  reluctant  in 
letting  us  know  how  we  can  help  in  that  effort. 

Mr.  McHuGH.  Thank  you. 

Just  for  some  general  ground  rules,  we  had  hoped  to  have  a  5- 
minute  light,  but  we  were  told  that,  with  all  the  other  lights,  those 
lights  don't  work  in  here.  Therefore,  we  would  just  ask  that,  as  we 
go  through  the  rounds  of  questioning,  members  could  try  to  contain 
their  questions  so  that  we  might  go  through  several  rounds.  We 
will  try  to  ensure  that  everybody  has  an  opportunity  to  pose  ques- 
tions to  the  Postmaster  General. 

Also,  we  have  been  informed  by  letter  that  it  is  the  custom  of  the 
oversight  committee  to  swear  in  all  witnesses  to  appear  before  ei- 
ther the  full  committee  or  the  subcommittee.  So  with  that,  if  you 
gentlemen  would  rise  and  stand  with  me,  and  we  will  administer 
the  oath. 

[Witnesses  sworn.l 

Mr.  McHuGH.  With  the  preliminaries  out  of  the  way,  we  would 
now  again  welcome  the  Postmaster  General,  Mr.  Marvin  Runyon, 
and  allow  him  to  make  the  formal  introductions  of  the  two  gentle- 
men who  have  accompanied  him. 

Mr.  Runyon,  welcome,  and  we  look  forward  to  your  testimony, 


Mr.  Runyon.  Grood  morning,  Mr.  Chairman  and  members  of  the 

With  me  today  are  Mike  Coughlin,  Deputy  Postmaster  Greneral, 
on  my  left,  and  Bill  Henderson,  Chief  Operating  Officer  and  Execu- 
tive Vice  President,  on  my  right.  We  are  glad  to  be  here  this  morn- 

We  have  got  good  news  to  share  with  you  and  the  American  peo- 
ple. I  am  encouraged  by  the  effort  of  our  employees  and  the 
progress  they  have  made  in  raising  our  performance.  It  is  no  secret 
that  we  had  problems  last  year,  particularly  in  a  few  of  our  larger 
cities.  Service  was  off,  our  customers  were  concerned.  We  re- 
sponded by  adjusting  our  management  structure,  focusing  on  the 
basics,  and  working  more  closely  with  major  mailers.  We  have  a  lot 
more  work  to  do,  but  our  folks  have  come  a  long  way  in  the  past 

I  am  also  encouraged  by  the  support  that  we  are  getting  from 
mailers  across  the  country.  Companies,  large  and  small,  are  bring- 
ing us  their  business  in  record  levels  and  working  closely  with  us 
to  make  sure  it  gets  delivered  quickly  and  consistently,  and  I  am 
encouraged  by  this  breath  of  change  that  is  in  the  air.  The  104th 
Congress  and  the  administration  have  the  opportunity  to  change 
the  Federal  Government  on  a  historic  change.  We  stand  ready  to 
help  in  any  way  we  can  to  make  government  more  businesslike  and 
responsive  to  the  American  people. 

This  morning  I  had  the  pleasure  of  welcoming  most  of  you  to  the 
Postal  Service.  We  are  what  government  service  is  all  about.  No 
other  organization  touches  more  lives  and  provides  more  livelihoods 
than  does  the  Postal  Service.  That  is  because  no  other  company 
does  what  we  do — serving  everyone — everywhere — every  day. 

The  American  people  count  on  the  mail  to  communicate  and  ex- 
change information.  American  businesses  count  on  the  mail  to 
bring  customers  in  the  door  and  dollars  to  the  bottom  line.  We  are 
talking  big  business  too.  Companies  marketing  their  products  and 
services  invested  $29.3  billion  in  the  mail  in  1994,  putting  us  in  a 
virtual  three-way  tie  with  television  and  newspapers  for  the  Amer- 
ican advertising  dollar.  They  made  their  sale  by  mail  too.  Consum- 
ers spent  more  than  $200  billion  in  mail  order  purchases  last  year. 
America  depends  on  the  mail. 

To  meet  that  responsibility,  I  think  we  have  to  accomplish  three 
things.  We  have  to  serve  the  Nation,  run  like  a  business,  and  keep 
an  eye  on  the  future.  We  are  doing  a  pretty  good  job  meeting  the 
first  mandate,  serving  the  Nation.  We  visit  125  million  addresses 
every  work  day — providing  fair,  economical  access  to  261  million 
Americans.  And  our  people  are  doing  it  better  than  ever;  84  percent 
of  all  local  first-class  mail  is  being  delivered  overnight,  tying  our 
best  performance  ever.  Tests  by  the  media — from  the  Washington 
Post  to  the  Los  Angeles  Times — show  even  better  results.  The  1994 
Christmas  season  was  the  best  on  record  with  customers  ranging 
from  ADVO  to  Wal-Mart  praising  the  efforts  of  our  employees. 

Financially  we  are  on  solid  ground.  Through  the  first  5  months 
of  our  fiscal  year,  we  have  a  preliminary  net  income  of  $531  mil- 
lion, well  ahead  of  forecast.  Revenue  is  up,  driven  by  a  5.3  percent 
increase  in  mail  volume,  yet  at  the  same  time  expenses  are  run- 
ning $176  million  under  operating  projections. 

Postal  employees  nationwide  are  doing  a  fine  job  in  terms  of  both 
bottom-line  performance  and  top  line  concern  for  customers.  They 
care  about  their  communities.  They  care  about  their  neighbors.  It 
shows  in  their  performance.  They  are  reminding  us  that  serving 
the  Nation  one  address  at  a  time  every  day,  consistently,  promptly, 
carefully,  is  important  worthwhile  work.  They  are  doing  a  good  job. 

That  brings  me  to  the  second  mandate,  running  the  Postal  Serv- 
ice like  a  business.  In  the  last  2^2  years  we  have  made  improve- 
ments in  this  area,  too.  We  restructured  our  organization,  saving 
$1  billion  a  year  without  resorting  to  layoffs;  we  held  rates  steady 
for  4  years,  saving  the  American  people  $14  billion;  and  we  kept 
the  eventual  increase  2  percentage  points  below  inflation. 

The  Postal  Reorganization  Act  of  1970  has  served  us  well,  creat- 
ing a  new  breed  of  government  organization — a  businesslike  public 
service.  But  the  law  never  envisioned  today's  highly  competitive 
communications  industry.  To  a  large  degree  it  puts  our  destiny  out- 
side of  our  control. 

Regulatory  oversight  is  appropriate,  but  it  should  not  impair  our 
ability  to  serve  customers  and  provide  them  with  products  they 
want  at  market  prices.  It  is  time  for  us  to  reexamine  the  25-year- 
old  law  that  created  this  organization.  It  is  time  for  us  to  take  the 
next  step — to  make  the  Postal  Service  more  business-like  and  com- 
petitive for  the  American  people. 

There  are  three  areas  we  need  to  focus  on.  First,  we  need  to  free 
our  employees  from  burdensome  rules  and  bureaucratic  red  tape 
and  focus  their  efforts  on  serving  our  customers'  mailing  needs;  sec- 
ond, we  need  to  free  the  price  setting  process  so  we  can  respond 
to  the  market,  stay  competitive,  and  keep  costs  down;  and,  third, 

we  need  to  free  our  products  of  bureaucratic  restrictions  and  make 
them  more  modern  and  customer  oriented. 

Let's  take  them  one  at  a  time,  starting  with  our  people.  We  have 
the  largest  civilian  work  force  in  the  Nation.  We  set  wages  and 
work  rules  through  collective  bargaining — but  it  is  clear  after  20 
years  that  the  process  is  broken.  For  the  fourth  time  in  the  last  six 
labor  contracts  we  are  headed  toward  a  settlement  dictated  by  arbi- 
trators— outsiders — people  who  aren't  accountable  to  postal  cus- 

The  methods  for  settling  employee  disputes  also  aren't  working. 
They  lead  to  multiple  appeals  on  the  same  issue.  They  produce  dif- 
ferent outcomes  in  similar  situations.  It  simply  doesn't  pay  to  make 
a  Federal  case  out  of  every  workplace  dispute,  not  for  employees, 
managers,  and  especially  our  customers  who  get  stuck  with  the 
tab.  We  must  have  a  system  that  promotes  cooperation  and  agree- 

The  second  area  we  need  to  change  is  prices.  The  price-setting 
process  is  out  of  sync  with  the  speed  and  direction  of  modern  busi- 
ness. It  takes  too  long,  it  costs  too  much,  and  it  is  too  inflexible. 

We  are  required  to  prepare  a  court  case  and  present  it  to  the 
Postal  Rate  Commission.  The  paperwork  for  the  last  one  filled 
more  than  50  boxes.  The  Commission  studies  the  filing;  they  hear 
testimony  from  customers.  Competitors  lobby  to  raise  our  prices  so 
they  can  raise  theirs,  then  the  Commission  deliberates  and  eventu- 
ally recommends  new  rates.  All  told,  it  takes  more  than  a  year,  and 
that's  no  way  to  run  a  business. 

While  we  have  to  spend  months  revealing  proprietary  business 
information  to  justify  new  rates,  other  companies  can  act  overnight. 
They  skim  the  cream  from  new  business  opportunities.  We  have  to 
wait  for  the  chance  to  compete. 

Outside  charges  have  also  impacted  the  prices  postal  customers 
must  pay.  Through  1998,  the  Postal  Service  will  have  paid  $14  bil- 
lion to  reduce  the  Federal  deficit  since  1987.  Some  are  now  propos- 
ing that  the  Postal  Service  prefund  its  health  care  costs.  However, 
this  would  cost  the  Postal  Service  at  least  $11.6  billion  and  have 
a  devastating  impact  on  our  finances.  It  would  force  us  to  file  a 
new  rate  case  seeking  at  least  a  2-cent  hike  in  the  first-class  stamp 
and  similar  increases  in  other  types  of  mail.  It  would  hurt  our  com- 
petitiveness and  undercut  the  progress  we  have  made.  It  is  the 
wrong  way  to  go. 

Together  we  can  correct  the  situation.  We  can  avoid  future  as- 
sessments on  postal  ratepayers.  We  can  simplify  the  rate-setting 
process  while  maintaining  appropriate  oversight,  and  make  it  fast- 
er and  much  less  expensive.  We  can  make  our  prices  more  market- 
based  and  competitive.  The  rewards  could  be  great.  With  enough 
business  latitude,  I  believe  1  day  we  could  become  a  profit  center 
for  the  Federal  Government. 

The  third  area  of  change  is  our  products.  Frankly,  much  of  our 
product  line  is  out  of  touch  with  the  market.  In  many  cases  you 
pay  for  what  you  are  sending,  not  when  you  want  it  to  get  there. 
Also,  regulations  are  still  too  complicated  and  weighty.  With 
changes  in  the  law,  we  can  get  the  pricing  flexibility  we  need  and 
the  freedom  to  bring  new  products  to  market  faster. 


Our  last  mandate  may  be  the  most  important — keep  an  eye  on 
the  future.  America  needs  the  mail — today,  tomorrow,  and  for  dec- 
ades to  come.  We  have  a  responsibility  to  provide  for  the  Nation's 
present  and  future  communication  needs.  We  must  continue  to  im- 
prove our  delivery  timeliness  and  keep  our  costs  low  and  competi- 
tive. Mr.  Chairman,  our  employees  are  working  to  do  just  that.  In 
addition,  customers  are  asking  us  to  support  their  use  of  electronic 
communications.  People  want  their  electronic  mail  to  be  as  private 
and  secure  as  the  letter  we  deliver  today.  With  the  help  of  some 
leading  edge  technology  firms,  we  have  developed  an  electronic 
postmark.  It  will  validate  and  safeguard  America's  e-mail  mes- 
sages, backed  by  some  of  the  toughest  tampering  laws  in  the  land. 

And  starting  this  spring  we  will  begin  testing  a  combination  of 
electronic  and  hard  copy  mail.  Working  with  some  major  cus- 
tomers, we  will  use  our  mail  scanning  equipment  to  notify  business 
customers  today  that  this  month's  order  or  last  month's  payment 
is  on  the  way.  This  new  product  will  help  companies  manage  their 
cash-flow  and  operations  better  and  lower  their  costs. 

We  need  to  keep  our  positive  momentum  going.  Hundreds  of 
thousands  of  postal  employees  are  doing  a  great  job  delivering  for 
the  American  people.  With  the  help  of  this  subcommittee,  they  can 
do  so  much  more. 

With  the  right  changes  in  the  laws  and  regulations,  we  can  con- 
tinue to  provide  the  communications  safety  net — mail  service  to  ev- 
eryone, everywhere,  every  day,  and  we  can  do  a  much  better  job 
of  operating  like  a  business,  making  ourselves  more  competitively 
fit  for  the  future.  Done  right,  these  changes  can  benefit  the  entire 
Nation,  bringing  better  service  quality  and  lower  prices. 

The  Postal  Service  can  deliver  excellence  to  the  American  people 
and  continue  to  be  one  part  of  (xovernment  that  pays  its  own  way. 
Mr.  Chairman,  we  look  forward  to  working  with  you  and  the  mem- 
bers of  this  subcommittee  to  deliver  a  new  Postal  Service,  one  that 
can  deliver  excellence  in  the  next  century. 

Thank  you. 

[The  response  to  written  questions  submitted  to  Mr.  Runyon  fol- 

Response  to  Written  Questions  Submitted  by  Hon.  John  M.  McHugh  to 

Marvin  Runyon  ^ 

Question  lA.  To  its  credit,  the  Postal  Service  is  measuring  and  attempting  to  im- 
prove mail  delivery  performance  and  customer  satisfaction.  Yet  various  news  media 
frequently  paint  a  negative  picture  of  mail  delivery,  and  this  has  been  the  case  re- 
cently in  the  Washington,  DC,  area.  Overall,  mail  delivery  problems  and  customer 
dissatisfaction  are  more  prevalent  in  larger  cities  than  mid-size  or  smaller  ones. 
What  do  you  see  as  the  most  significant  barriers  to  improving  the  Service's  on-time 
delivery  performance  and  achieving  significantly  higher  levels  of  customer  satisfac- 

Answer.  Growing  volumes,  a  constantly  expanding  delivery  base  and  the  highly 
complex  nature  of  the  postal  system  itself  all  present  significant  challenges  to  our 
efforts  to  improve  service  performance.  We  are  focusing  our  efforts  in  several  key 
areas  which  we  believe  hold  considerable  promise  for  service  improvements.  One  of 
those  is  the  area  of  address  quality.  In  many  of  our  urban  areas,  a  substantial  num- 
ber of  deliveries  are  apartment  houses,  and  for  a  variety  of  reasons  (e.g.,  security) 
apartment  residents  choose  not  to  use  their  apartment  numbers.  The  result  is  that 
we  can't  take  full  advantage  of  our  less  error  prone  automated  processing,  and  we 

'Note:  Due  to  the  high  cost  of  printing.  Attachments  I- VIII  have  been  retained  in  the  sub- 
committee files. 

must  rely  on  the  personal  knowledge  of  the  carrier  to  effect  delivery.  Another  area 
of  concern  is  our  continuing  reliance  on  commercial  air  transportation  for  a  signifi- 
cant portion  of  our  First-Class  Mail  movement.  We  have  no  direct  control  to  ensure 
that  our  mail  is  transported  in  accordance  with  our  service  commitments.  For  exam- 
ple, mail  may  be  bumped  to  accommodate  passenger  traffic.  Similarly,  since  the  ma- 
jority of  routings  are  not  on  direct  air  transportation,  we  rely  upon  the  air  carriers 
to  effect  prompt  transfers  which  unfortunately  are  not  always  accomplished  accord- 
ing to  our  service  needs.  In  many  of  our  large  urban  areas  we  face  unique  service 
challenges.  While  a  significant  facility  modernization  program  is  in  place,  a  number 
of  postal  facilities  are  aging  and  not  necessarily  designed  for  optimal  efficiencies. 
Transportation  on  heavily  congested  streets  is  also  a  problem,  as  is  the  coordination 
mail  movement  among  numerous  facilities  in  close  geographic  proximity. 

Question  IB.  Given  that  the  news  media  often  cites  data  gathered  and  reported 
by  the  Postal  Service  to  criticize  its  performance,  what  plans,  if  any,  do  you  have 
to  change  yovu-  public  reporting  of  such  data? 

Answer.  We  work  very  hard  to  provide  news  media  with  the  necessary  perspective 
on  data  that  management  releases,  be  it  service  performance  data  or  financial  data. 
Invariably,  when  we  have  the  opportunity  to  provide  background,  the  media  reports 
the  story  accurately.  The  obstacle  we  face — like  other  government  organizations  in 
Washington,  D.C. — is  the  reporting  of  misinformation  or  data.  Often,  we  find  that 
in  these  instances,  the  information  is  either  incomplete  or  its  analysis  is  slanted  to 
a  particular  point  of  view. 

Question  2A.  A  report  prepared  by  GAO  in  1992  states  that  the  Postal  Service 
was  developing  a  customer  satisfaction  index  intended  to  monitor  the  satisfaction 
levels  of  business  customers,  which  account  for  88  percent  of  the  Service's  mail  vol- 
ume. I  understand  that  the  Gallup  organization  was  awarded  the  contract  to  collect 
this  data.  What  is  the  current  status  of  this  effort?  Has  the  Service  received  any 
survey  results  on  business  customer  satisfaction?  If  not,  when  does  the  Service  ex- 

{»ect  to  receive  results  from  the  survey?  If  so,  what  do  the  results  show  is  the  overall 
evel  of  satisfaction?  Are  your  managers  and  employees  using  information  from 
these  surveys  to  improve  business  customer  satisfaction? 

Answer.  The  Business  Customer  Satisfaction  Index  (BCSI)  is  an  ongoing  process 
of  measuring  the  satisfaction  level  of  our  business  customers.  The  BCSI  system  has 
gathered  data  since  Quarter  FV,  FY  1994.  At  this  point  three  quarters  of  data  are 
available  (Quarter  IV,  FY  1994;  Quarter  I,  FY  1995;  Quarter  II,  FY  1995).  The  BCSI 
looks  at  customers  in  a  very  a  specific  way.  The  marketplace  is  segmented  into  na- 
tional accounts  (very  large  mailers);  premier  accounts  (mailers  spending  over 
$250,000  or  more  in  postage  but  not  national  accounts);  business  accounts  (mailers 
spending  less  than  $250,000  in  postage);  and  smaU  businesses  (mailers  spending 
less  than  $100,000  on  postage).  Therefore,  there  is  not  an  overall  rating  for  business 
customers,  nor  are  the  results  of  the  individual  categories  rolled  up  into  a  national 
rating.  A  review  of  our  BCSI  performance  indicators  is  currently  being  conducted 
by  an  action  planning  team  focused  on  the  Malcolm  Baldrige  criteria,  section  7.4 
Customer  Satisfaction  Determination.  Upon  completion  of  this  review,  a  determina- 
tion will  be  made  regarding  the  release  of  BCSI  data. 

Question  2B.  How  much  have  you  spent  on  this  contract  to  date?  Please  supply 
a  copy  of  the  contract  for  the  record. 

Answer.  The  Postal  Service  signed  a  four  year  fixed  price  contract  with  the  Gallup 
Organization  on  April  8,  1993,  for  $8.3  million  to  develop  and  implement  the  BCSI 
process.  Since  the  contract  signing,  several  modifications  have  been  made  including 
additional  sampling  of  large  business  accounts  and  an  improved  process  for  identify- 
ing the  appropriate  customer  contacts  to  be  surveyed.  These  improvements  in- 
creased the  net  fixed  price  of  the  BCSI  contract  to  $11.9  million,  which  will  be  ex- 
pended over  the  life  of  the  contract.  The  Postal  Service  has  expended  $4.2  million 
to  date,  for  research  and  development,  pilot  testing,  and  quarterly  data  collection. 
A  copy  of  the  contract  is  provided  as  Attachment  I. 

Question  3.  In  a  recent  speech  to  the  National  Press  Club,  you  mentioned  a  Peter 
Hart  survey  that  showed  85  percent  of  Americans  consider  mail  service  reliable,  al- 
though 39  percent  see  a  wide  gap  between  the  "good"  service  they  receive  and  the 
"excellent"  service  they  expect.  Was  this  survey  requested  by  Postal  Service?  If  so, 
why  was  it  needed  if  you  already  have  the  Customer  Satisfaction  Index? 

Answer.  The  findings  cited  were  incidental  to  the  purpose  of  the  Peter  Hart  re- 
search. They  were  developed  from  a  survey  commissioned  by  our  Corporate  Rela- 
tions department  to  measure  the  effectiveness  of  information  being  provided  to  the 
general  public  about  the  proposed  rate  increases.  The  purpose  of  the  survey  was  to 
determine  if  messaging  elements  such  as  "four  years  since  the  last  rate  increase," 
"we  don't  use  your  taxes,"  etc.  were  having  an  impact  on  the  receiving  audiences. 
We  also  wanted  to  gauge  the  impact  of  the  negative  news  coverage  about  service 


problems  in  Chicago  and  Washington,  D.C.,  and  determine  if  it  had  seriously  dam- 
aged the  reputation  and  image  of  the  Postal  Service.  These  are  not  elements  that 
can  be  determined  from  the  data  in  the  Customer  Satisfaction  Index. 

Question  4.  My  office  was  recently  contacted  by  a  third  class  mailer  who  claims 
$5,000  in  third  class  merchandise  was  lost  by  the  Postal  Service.  What  are  your  pro- 
cedures in  addressing  such  a  claim? 

Answer.  We  provide  several  services  that  may  be  purchased  at  the  time  of  mailing 
that  will  provide  indemnity  for  third-class  merchandise.  Insurance  can  be  purchased 
for  articles  sent  by  third-class  mail  to  provide  coverage  up  to  $600  for  loss  or  dam- 
age which  occurs  in  the  mail.  In  the  event  of  loss,  the  mailer  may  file  an  indemnity 
claim  at  any  post  office  by  presenting  the  original  mailing  receipt  showing  that  in- 
surance coverage  was  purchased  and  a  written  statement  from  either  the  addressee 
or  the  addressee's  post  office  stating  that  the  article  was  not  delivered. 

Customers  may  also  choose  to  send  requested  third-class  merchandise  as  CoUect- 
on-Delivery  (COD)  and  have  the  amount  of  the  merchandise  and/or  the  amount  of 
the  postage  and  fees  collected  from  the  addressee.  COD  service  also  includes  insur- 
ance coverage  for  the  value  of  the  merchandise. 

Question  5.  You  state  in  your  testimony  that  84  percent  of  all  local  First  Class 
Mail  is  being  delivered  overnight.  What  is  the  Service's  goal  for  overnight  First 
Class  on-time  service  performance. 

Answer.  Our  goal  is  for  each  performance  cluster  to  provide  consistent  service  per- 
formance and  continuously  improve. 

Question  6A.  The  Postal  Service  used  to  advertise  its  Priority  Mail  as  "2  pounds 
in  2  days  for  2  dollars".  Because  of  the  Service's  inability  to  consistently  deliver  Pri- 
ority Mail  in  2  days,  the  ad  was  dropped.  In  1993  testimony  before  the  Senate,  you 
stated  that  the  Service  was  committed  to  delivering  90  percent  of  Priority  Mail 
within  2  days  by  the  end  of  September  1993.  However,  according  to  your  1994  An- 
nual Report,  80  percent  of  Priority  Mail  was  delivered  within  2  days,  which  is  down 
from  the  1993  figure  of  84  percent.  How  do  you  explain  these  declining  statistics? 
What  are  you  doing  about  it? 

Answer.  While  we  have  not  yet  achieved  our  short-term  goal  of  delivering  90  per- 
cent of  all  Priority  Mail  within  two  days  nationally,  there  are  many  origins  and  des- 
tinations within  our  network  that  regularly  meet  or  exceed  that  goal.  In  1994,  we 
went  through  a  Business  Process  Reengineering  of  Priority  Mail.  This  process  en- 
abled us  to  closely  examine  each  step  in  the  Priority  Mail  system.  We  are  currently 
in  the  process  of  fine  tuning  the  reengineering  effort. 

Question  6B.  How  do  you  respond  to  complaints  from  customers  that  they  paid 
for  a  service — two  day  delivery — that  they  did  not  receive?  What  steps  do  you  have 
in  place  to  begin  to  respond  to  customers  who  are  not  satisfied  with  the  service  they 
are  receiving? 

Answer.  We  have  removed  any  reference  to  "2-day"  delivery  from  our  advertise- 
ments. However,  we  still  recognize  our  obligation  to  meet  service  commitments.  In 
those  instances  where  we  fail  to  do  so,  we  have  managers  across  the  country  work- 
ing with  local  Priority  Mail  customers  to  analyze  specific  problems.  In  some  cases, 
the  fix  can  be  as  simple  as  rerouting  a  truck  or  changing  a  dispatch  time.  In  other 
cases,  it  becomes  more  complicated  trying  to  determine  where  in  the  process  the 
breakdown  occurred.  We  are  preparing  to  put  in  place  a  "system"  that  will  help  us 
to  determine  the  root  causes  of  failures  so  that  we  can  be  more  responsive. 

Question  6C.  Are  you  still  committed  to  delivering  90  percent  of  Priority  mail 
within  2  days?  If  so,  when  will  you  achieve  this  goal  and  how? 

Answer.  Based  on  our  current  operating  plans  and  available  transportation,  95 
percent  of  Priority  Mail  is  committed  for  delivery  within  two  days.  We  are  currently 
in  the  process  of  fine  tuning  the  reengineering  effort  as  well  as  preparing  the  cost 
analysis  for  implementation.  We  are  planning  that  a  number  of  test  sites  will  be 
up  and  running  before  the  end  of  the  year. 

Question  6D.  As  of  1993,  the  Postal  Service's  national  performance  goal  for  Prior- 
ity Mail  was  2  day  delivery  95  Percent  of  the  time;  is  this  still  a  goal?  When  and 
how  will  it  be  achieved? 

Answer.  Our  ultimate  goal  for  on-time  service  performance  is  to  provide  the  same 
level  of  service  as  our  competitors  which  generally  falls  within  the  range  of  95-97 
percent.  Once  our  plan  is  fully  implemented,  we  feel  we  will  be  in  a  position  to  pro- 
vide this  level  of  service. 

Question  7.  A  few  years  ago,  the  Postal  Service  lowered  service  standards  for  a 
significant  portion  of  First-Class  Mail.  Some  First-Class  Mail  that  was  supposed  to 
be  delivered  overnight  was  put  into  the  two-day  delivery  category  and  some  two- 
day  mail  was  put  in  the  three-day  delivery  category.  This  change  was  supposed  to 
improve  on-time  delivery  performance  for  all  mail.  However  the  Postal  Service's  per- 


formance  does  not  appear  to  have  improved.  Do  you  have  any  plans  to  further  revise 
service  standards? 

Answer.  We  do  not  have  any  plans  to  systematically  review  and  revise  the  current 
First-Class  Mail  service  commitments. 

Question  8.  The  Washington  Post  recently  reported  that  the  Board  of  Governors 
had  taken  greater  control  of  decisions  on  selection  and  compensation  of  Postal  Serv- 
ice executives.  What  involvement  did  the  Board  have  in  this  area  in  the  past?  Spe- 
cifically, what  was  the  process  followed  in  selecting  your  current  Vice  Presidents 
and  setting  their  total  compensation?  How  has  this  processed  now  changed? 

Answer.  Regarding  the  selection  of  Postal  Service  executives  (PCES-II  level  offi- 
cers), the  Board  of  Governors  has  no  involvement  in  their  selection  and  appoint- 
ment. The  Postal  Reorganization  Act  states  specifically  that  officers  are  "appointed 
by,  and  serve  at  the  pleasure  of,  the  Postmaster  General"  (39  U.S.C.  204).  There 
are,  however,  two  exceptions:  1)  The  Bylaws  of  the  Board  require  the  concurrence 
of  the  governors  with  the  Postmaster  General  in  the  removal  or  transfer  of  the  Chief 
Postal  Inspector  [39  C.F.R.  3.4(f)].  2)  The  charter  of  the  Audit  Committee  provides 
that  the  official  responsible  for  the  internal  audit  function  (Assistant  Chief  Inspec- 
tor— Audit)  may  be  removed  only  by  action  of  the  Board.  (BOG  Resolution  No.  82- 

There  has  not  been  a  real  change  in  the  process  for  setting  officers'  compensation. 
For  years  a  bylaw  of  the  Board  has  reserved  for  Board  approval  the  compensation 
of  officers  in  level  PCES-II.  [39  C.F.R.  3.3(n)].  In  August  1992,  to  better  utilize  the 
Board's  time,  the  Board  delegated  authority  to  the  Postmaster  General  to  fix  the 
compensation  of  officers  within  a  salary  range  and  to  report  to  the  Board  periodi- 
cally on  officers'  compensation  levels.  In  February  1995  the  Board  established  a 
Compensation  Committee,  consisting  of  four  governors,  to  review  officers'  compensa- 
tion and  any  performance  based  incentive  plan  for  PCES-I  managers  and  PCES- 
II  officers  and  to  make  its  recommendations  to  the  full  Board  on  management's  pro- 
posals. (BOG  Resolution  No.  95-3.) 

Question  9A.  Diuing  your  approximately  two  and  a  half  years  as  Postmaster  Gen- 
eral, there  have  been  many  changes  at  the  corporate  officer  level.  Sixteen  of  the  21 
Vice  Presidents  in  postal  headquarters  have  served  less  time  than  you  in  current 
positions.  Some  key  leadership  positions  are  vacant  such  as  Consumer  Advocate. 
What  has  been  the  reason  for  this  turnover  at  the  corporate  officer  level? 

Answer.  There  are  several  reasons  for  the  changes  we  made  at  the  corporate  offi- 
cer level:  these  included  personal  reasons,  performance  reasons,  and  organizational 
redesign  reasons  when  we  saw  our  original  structure  needed  some  adjustments. 

Question  9B.  Will  the  vacant  officer  positions  be  filled?  If  so,  when? 

Answer.  We  currently  have  four  officer  vacancies:  Vice  President,  Marketing  Sys- 
tems; Vice  President  and  Consumer  Advocate;  Vice  President,  Product  Management; 
and  the  Vice  President,  Retail.  We  are  currently  considering  finalists  for  the  Vice 
President,  Marketing  Systems.  We  are  identifying  candidates  for  the  Vice  President 
and  Consumer  Advocate  and  the  Vice  President,  Retail.  We  will  be  filling  the  Vice 
President,  Product  Management,  sometime  in  the  future. 

Question  9C.  You  recently  announced  the  appointment  of  your  former  Vice  Presi- 
dent for  Marketing  Systems  as  your  new  Vice  President  for  Human  Resources.  It 
would  appear  at  first  glance  that  there  is  quite  a  bit  of  difference  between  the  areas 
of  marketing  and  human  resources;  what  led  you  to  believe  that  the  experience 
gained  in  marketing  was  transferable  to  human  resources? 

Answer.  Ms.  Sonnenberg's  marketing  experiences  are  certainly  transferable  to 
Human  Resources.  Just  as  the  Marketing  function  is  customer  focused,  so,  too,  is 
the  Human  Resources  function.  Ms.  Sonhenberg  brings  her  knowledge  and  experi- 
ence in  developing  and  implementing  systems,  procedures  and  programs  affecting 
field  operations.  She  also  brings  a  sense  of  reality  to  Human  Resources  based  on 
her  leadership  in  postal  rate  cases.  Finally,  as  an  officer  of  the  Postal  Service  she 
brings  her  global  vision  and  strategic  planning  capabilities. 

Question  9D.  I  understand  that  several  former  City  Bank  employees  have  been 
hired  as  consultants  to  the  Postal  Service  after  Mr.  Loren  Smith  became  Senior  Vice 
President  for  Marketing.  Mr.  Smith  is  a  former  City  Bank  official.  How  many  such 
consultants  have  been  hired? 

Answer.  There  have  not  been  any  former  Citibank  employees  hired  as  consultants 
to  the  Postal  Service.  Five  individuals/firms  with  whom  Mr.  Smith  has  had  profes- 
sional relationships  in  the  past  are  presently  under  consulting  contract  with  the 
Postal  Service  for  varying  business  needs. 

Question  9E.  Please  explain  the  situation  surrounding  the  recent  retirement  of  the 
Postal  Service's  Consumer  Advocate,  Ann  Robinson,  and  elaborate  on  any  subse- 
quent changes  to  the  external  measurement  systems  you  have  in  place.  What  office 


is  responsible  for  receiving,  monitoring,  analyzing,  and  reporting  these  measure- 

Answer.  Vice  President  and  Consumer  Advocate  Ann  McK.  Robinson  chose  to  re- 
tire on  January  20,  1995,  after  a  successful  29  year  postal  career.  The  Consimier 
Advocate's  Office  is  still  responsible  for  receiving,  monitoring,  analyzing  and  report- 
ing on  all  the  external  measurements  for  the  Postal  Service. 

Question  lOA.  One  of  the  complaints  of  mailers  and  union  officials  is  that  the  posi- 
tion of  the  Postmaster  General  has  had  significant  turnover.  This  turnover  has  re- 
sulted in  constant  changes  in  management  of  the  organization  resulting  from  the 
style  that  is  brought  to  the  organization  by  new  leadership.  As  noted  in  the  previous 
question,  changes  in  your  senior  level  leadership  has  been  significant.  Please  ex- 

Sdain  how  you  are  attempting  to  control  constant  management  changes  due  to  dif- 
ierent  management  styles  at  the  levels  directly  below  you. 

Answer.  Change  is  an  integral  part  of  toda/s  business  environment.  Identifying 
and  placing  successftil  managers  in  critical  vacancies  is  an  ongoing  process.  The 
management  changes  executed  over  the  last  two  years  have  resulted  in  the  Postal 
Service  attaining  its  financial  goals  and  improving  service  to  its  highest  levels,  as 
independently  reported  by  Price  Waterhouse.  Rather  than  attempting  to  control 
these  successful  changes,  we  will  continue  to  look  for  opportunities  to  appoint  execu- 
tives and  managers  capable  achieving  our  corporate  goals. 

Question  lOB.  What  are  your  visions  for  the  long-term  of  the  current  management 
team  that  you  have  in  place?  That  is,  are  there  additional  management  changes 
that  you  foresee  at  the  senior  levels  over  the  next  two  years  or  do  you  think  you 
have  the  correct  management  team  in  place  now? 

Answer.  Currently  we  have  four  officer  vacancies.  We  are  in  the  process  of  identi- 
fying and  appointing  qualified  individuals  to  fill  these  important  positions.  The  cur- 
rent officer  corps  consists  of  executives  who  are  helping  the  Postal  Service  achieve 
its  strategic  goals  and  are  a  successftil  management  team.  We  anticipate  that  as  fu- 
ture vacancies  occur,  as  they  do  in  any  dynamic  workforce,  we  will  fill  those  posi- 
tions with  similarly  experienced  individuals. 

Question  HA.  In  the  1992  reorganization,  you  eliminated  30,000  jobs,  but  over 
48,000  workers  left  the  Service.  As  a  result,  many  faciUties  lacked  qualified  job  ap- 
plicants and  overtime  was  running  higher  than  anticipated.  Although  the  restruc- 
turing cost  the  Service  slightly  over  a  billion  dollars,  you  expected  to  save  about  $1.4 
billion  annually  beginning  in  1994.  However,  GAO's  report  on  automation  released 
on  February  22,  1995,  shows  that  career  employment  has  grown  to  pre-downsizing 
levels.  To  what  extent  have  you  hired  new  employees  to  replace  those  who  retired 
as  part  of  the  1992  downsizing?  Also,  please  provide  for  the  record  a  chart  showing 
for  each  year  since  1990,  the  nvimber  of  full-time,  part-time,  and  transitional  em- 
ployees working  for  the  Postal  Service  at  the  beginning  of  each  fiscal  year.  Please 
include  a  brief  explanation  of  how  or  when  a  transitional  employee  becomes  a  fiiU- 
time  employee. 

Answer.  It  is  not  possible  from  national  statistics  to  determine  whether  individual 
employees  were  hired  due  to  mail  volume  and  Population  growth,  or  as  replacement 

Attachment  II  is  a  report  which  shows  the  NALC  and  APWU  employment  figures 
for  full-time,  part-time  and  transitional  employees  for  each  union  as  of  accounting 
period  1  each  fiscal  year.  It  does  not  include  EAS,  rural  carriers,  mail  handlers,  etc. 
in  our  counts  since  there  is  no  transitional  category  of  emplo3rment  for  those  groups. 
The  second  report  shows  the  number  of  transitional  employees  currently  on  the  rolls 
in  each  of  our  Performance  Clusters  in  order  of  highest  to  lowest. 

With  regard  to  how  a  transitional  employee  becomes  career,  the  Postal  Service 
signed  a  Memorandum  of  Understanding  (MOU)  for  enhanced  career  opportunities 
with  the  National  Association  of  Letter  Carriers  (NALC)  in  July  30,  1993,  that  gave 
NALC  transitional  employees  an  opportunity  to  take  the  examination  for  career  ap- 
pointment. A  minimum  of  180  days  employment  in  a  transitional  assignment  is  re- 
quired for  a  transitional  employee  to  take  the  examination.  On  September  24,  1993, 
we  signed  a  similar  MOU  with  the  American  Postal  Workers  Union  which  gave 
their  transitional  employees  two  opportunities  to  take  an  examination. 

Concerning  transitional  employees  understanding  of  our  emplojmient  procedures, 
we  recently  introduced  a  new  battery  examination  which  replaced  four  of  our  older 
examinations.  Because  of  this  change.  Districts  posted  instructions  in  work  places 
with  transitional  employees  for  them  to  sign  up  to  take  the  new  examination.  In 
the  case  of  both  NALC  and  APWU  transitional  employees,  they  are  represented  by 
their  unions,  which  polices  the  appropriate  application  of  the  respective  MOUs  with 
regard  to  career  opportunities. 

Once  transitional  employees  qualify  on  the  examination,  their  names  are  placed 
on  the  competitive  hiring  register  in  regular  rank  and  score  order  along  with  other 


applicants.  This  includes  veteran  preference  points  when  claimed.  Transitional  em- 
ployees are  given  consideration  for  conversion  to  career  status  if  their  scores  come 
within  competitive  reach  on  the  register. 

Question  IIB.  What  is  the  current  staffing  level  in  Postal  Service  headquarters 
operations,  and  ho'.t'  does  this  compare  to  the  headquarters'  staffing  level  before  the 
restructuring  began  in  1992? 

Answer.  The  current  staffing  level  in  the  Postal  Service  Headquarters  as  reflected 
in  the  ORPES  report  for  A/P  6-95  (3/17/95)  is  1,724  which  represents  a  reduction 
of  741  employees  from  the  headquarters  complement  before  restructuring.  The 
Headquarters  staffing  level  in  A/P  11-92  (7/10/92)  was  2,465  on-rolls. 

During  accounting  period  six  of  Fiscal  Year  1992,  the  Postal  Service  had  2,470 
employees  on  the  roUs  at  Headquarters  at  L'Enfant  Plaza  and  an  additional  10,098 
in  headquarters  field  service  units.  During  accounting  period  six  of  fiscal  year  1995, 
the  Postal  Service  had  1,796  employees  on  the  rolls  at  Headquarters  at  L'Enfant 
Plaza  and  an  additional  8,354  in  headquarters  field  service  units.  Current  Head- 
quarters staffing  represents  a  reduction  of  27  percent  at  L'Enfant  Plaza  and  a  17 
percent  reduction  in  headqiiarters  field  service  units  from  1992  levels. 

Question  IIC.  How  many  Postal  Service  employees  who  took  the  buyouts  were 
later  employed  by  the  Postal  Service  as  consultants  or  as  principals  of  small  cor- 
porations which  received  contracts  fi-om  the  Service? 

Answer.  Attachment  HI  is  a  list  of  former  employees  who  have  contracted  directly 
with  the  Postal  Service  since  the  buyouts  began  in  August  1992.  This  list  does  not 
reflect  principals  of  small  corporations  which  have  received  contracts  from  us;  nor 
does  it  reflect  former  postal  employees  who  may  now  be  employed  by  a  Postal  Serv- 
ice contractor.  This  is  because  our  contractual  data  base  tracks  the  contractor  with 
whom  we  contract,  not  the  employees  working  for  the  contractor  (whether  they  are 
former  postal  employees  or  not).  To  determine  the  principals  of  small  corporations 
which  have  contracts  would  require  research  into  the  articles  of  incorporation  of 
each  of  the  corporate  contractors.  This  sort  of  data  is  also  not  captured  or  tracked 
by  our  contractual  data  base. 

Question  IID.  Given  that  you  expected  to  save  about  $1.4  billion  annually  begin- 
ning in  1994,  how  much  money  did  the  Postal  Service  save  in  fiscal  year  1994  as 
a  result  of  the  downsizing?  What  are  you  estimating  for  savings  in  fiscal  year  1995 
as  a  result  of  downsizing? 

Answer.  As  a  result  of  the  Postal  Service's  aggressive  steps  to  eliminate  layers 
of  bureaucracy,  to  streamline  administrative  functions,  and  to  reduce  overhead  staff- 
ing, the  restructxuing  of  late  1992  and  early  1993  eliminated  over  23,000  equivalent 
overhead  positions.  The  savings  associated  with  the  overhead  reduction  in  1993  car- 
ried over  to  $1.3  billion  in  annualized  savings  in  1994  and  in  years  to  come. 

Question  HE.  What  advice  did  the  Office  of  Personnel  Management  give  you  and 
the  Postal  Service  regarding  how  to  downsize  the  organization  without  violating  the 
government-wide  reduction-in-force  rules?  What  advice  did  your  General  Counsel 
offer  regarding  the  risk  of  violating  the  statutory  rights  of  veterans  during  the 

Answer.  In  the  summer  of  1992,  dvuing  a  meeting  with  representatives  of  the  Of- 
fice of  Personnel  Management  (0PM),  the  Postal  Service  was  advised  that  a  reduc- 
tion-in-force (RIF)  should  be  conducted  only  as  a  last  resort  when  downsizing  an 
agency.  With  the  advice  of  Counsel,  the  Postal  Service  considered  a  number  of  alter- 
natives which  were  sanctioned  in  OPM's  RIF  regulations  and  the  Federal  Personnel 
Manual.  The  Postal  Service  sought  and  received  0PM  approval  for  a  voluntary 
early-out  retirement  period.  The  original  period  of  August  17  through  October  8, 
1992,  was  extended  to  November  20,  1992,,  at  the  Postal  Service's  request.  Further, 
the  Postal  Service  offered  as  an  incentive  the  equivalent  of  six  months'  salary  to 
those  employees  who  chose  to  retire. 

As  another  alternative  to  a  RIF,  the  Postal  Service  assigned  employees  to  posi- 
tions in  the  new  structure  without  the  loss  of  grade  and  pay.  Interpreting  its  own 
regulations,  OPM  said  that  this  was  not  a  RIF.  In  fact,  0PM  stated  clearly: 

Inasmuch  as  all  actions  taken  by  the  Postal  Service  were  reassignments  without 
loss  of  pay,  grade  or  tenure,  there  cannot  have  been  a  RIF  under  OPM's 
regulations  .  .  .  There  simply  was  not  RIF;  it  is  impossible  in  these  circumstances, 
(emphasis  in  original) 

Office  of  Personnel  Management's  Brief  in  Support  of  its  Intervention  in  Robin- 
son, et  al.  V.  U.S.  Postal  Service,  p.  9. 

Ignoring  OPM's  interpretation  of  its  own  regulations,  the  MSPB  Board  found  that 
the  Postal  Service's  1992/1993  restructiuing  was  a  RIF. 

Question  12.  Related  to  the  aftermath  of  your  1992  downsizing  and  restructuring, 
a  "performance  cluster"  concept  is  now  being  pushed  at  the  operating  level  to  get 
managers  in  different  fiinctions  to  voluntarily  coordinate  their  efforts  and  work  to- 


gether  effectively.  Some  postal  officials  believe  that  management  positions  that  ex- 
isted before  the  downsizing  at  the  district  and  plant  level  to  coordinate  customer 
service  and  processing  operations  need  to  be  reestabUshed.  Such  a  position  was  es- 
tablished recently  for  the  Washington,  D.C.,  metropolitan  area  because  of  poor  deliv- 
ery service.  How  well  is  the  performance  cluster  concept  working?  Do  you  plan  to 
reestablish  local  manager  positions  to  oversee  both  customer  service  and  mail  proc- 
essing operations  in  the  metropolitan  area? 

Answer.  The  performance  cluster  concept  is  generally  working  well,  as  evidenced 
by  the  significant  improvements  in  service  and  financial  indicators.  We  will  continue 
the  open  dialogue  with  field  management  about  the  need  to  expand  the  Metro  Man- 
ager concept  used  in  Washington,  D.C.,  (or  other  alternatives)  to  other  Districts  or 
large  complex  Metropolitan  locations. 

Question  13 A.  In  1993,  you  said  that  the  Postal  Service  had  lost  $100  million  or 
more  as  a  result  of  postage  meter  fraud.  According  to  a  GAO  report  on  the  subject, 
the  Postal  Service  had  relied  largely  on  postage  meter  manufacturers  to  account  for 
meters  and  ensure  that  the  meters  were  used  by  customers  for  postage  pajrment 
transactions  totaling  about  $21  billion  in  1993.  GAO  reported  that  controls  over 
postal  meters  have  been  inadequate  and  that  a  substantial  risk  exists  that  postage 
meters  are  being  used  to  defraud  the  Postal  Service.  What  steps  have  been  com- 
pleted to-date  to  get  better  control  over  postage  meters?  What  are  the  current  esti- 
mates of  losses  associated  with  meter  fraud? 

Answer.  Working  with  our  customers,  foreign  postal  administrations,  and  the 
meter  manufacturers,  we  have  sought  to  identify  and  implement  greatly  improved 
controls  over  the  use  of  postage  meters  and  to  reduce  uie  risk  of  postage  meter 
fraud.  The  primary  aspects  of  this  effort  are  the  following: 

1.  The  Postal  Service  is  building  a  national  database  which  will  centralize  rel- 
evant information  about  who  uses  meters,  which  meters  they  have  and  how  they 
use  them.  A  total  inventory  of  all  meters  is  included  by  serial  number  and  location 
and,  by  May  30,  1995,  the  manufactvu-ers  will  affix  to  every  meter  in  use  a  bar- 
coded  label  that  will  aid  in  automating  the  tracking  of  meters.  The  database  will 
also  include  the  serial  numbers  of  all  lost  and  stolen  meters  and  a  record  of  postage 
purchased  for  each  meter.  One  aspect  of  this  system,  now  in  place,  involves  the  sam- 
pling on  a  daily  basis  of  thousands  of  pieces  of  metered  mail.  Where  meter  indicia 
are  noted  that  bear  the  serial  numbers  of  lost  or  stolen  meters,  the  Inspection  Serv- 
ice investigates  to  determine  if  the  meter  is  in  legitimate  use.  At  least  two  cases 
of  fraudulent  use  have  been  identified  and  hundreds  of  meters  improperly  reported 
as  lost  or  stolen  have  been  identified. 

2.  Meter  Improvements.  All  existing  meters  are  being  examined  to  determine  if 
they  are  subject  to  tampering.  Those  that  are  found  to  be  vulnerable  are  being  modi- 
fied by  the  manufacturers  to  eliminate  this  risk.  The  type  of  meter  that  initially 
raised  concern  about  tempering  has  been  removed  from  the  market. 

3.  Meter  Supplier  Procedures.  Manufacturers  will  be  required  to  report  any  known 
security  deficiency  in  their  meters,  to  increase  their  inspections  of  meters  placed  in 
what  we  believe  are  high  risk  locations,  and  we  are  working  on  procediu-es  to  in- 
crease the  security  of  meter  shipments  to  and  from  manufacturers. 

4.  Postal  Service  Procedures.  We  have  adjusted  our  procedures  for  inspecting  me- 
ters to  pay  greater  attention  to  meters  in  high  risk  locations,  to  examine  any  meter 
that  has  not  been  reset  with  postage  during  a  three-month  period,  to  place  more 
secure  seals  on  meters,  and  to  tighten  our  procedures  for  refunds  of  metered  post- 

5.  Meter  Regulations.  A  sweeping  revision  of  our  regulations  relating  to  the  use 
of  postage  meters  was  published  in  the  Federal  Register  of  January  31,  1995  (60 
F.R.  5964).  The  time  for  comment  on  the  proposed  regulations  expired  on  March  17, 
1995,  and  comments  are  now  being  analyzed.  We  expect  to  publish  a  final  rule  with- 
in the  next  few  months. 

6.  New  Technology.  We  have  been  working  with  the  meter  manufacturers  and  oth- 
ers to  develop  more  secure  postage  pajonent  systems  than  the  mechanical  meters 
that  currently  dominate  the  market.  Promising  computerized  systems  using 
encrypted  data  are  being  considered  at  the  present  time  and  early  exemplars  of  this 
technology  are  beginning  to  enter  the  market. 

Question  13B.  Meter  manufacturers  lease  Postal  Service  approved  meters  directly 
to  mailers.  Some  maUers  have  complained  about  the  continuing  and  increasing  cost 
of  leasing  these  meters,  particularly  after  the  actual  cost  of  the  postage  meter  has 
been  met.  What  has  the  Postal  Service  done  to  address  mailers'  concerns  about 
these  leasing  fees? 

Answer.  Postal  Service  regulations  prohibit  the  individual  ownership  of  a  postage 
meter  for  reasons  of  control  and  security.  Meter  manufacturers  lease  postage  meters 
for  reasons  of  control  and  secvuity.  Meter  manufacturers  lease  postage  meters  to  in- 


dividuals  and  provide  maintenance  service  and  supplies  to  them.  The  monthly  pay- 
ment agreed  upon  in  the  terms  of  the  leasing  agreement,  in  theory,  offsets  the  cost 
of  maintenance  provided,  the  manufacturer's  costs  to  comply  with  Postal  Service  se- 
curity and  inspection  requirements,  and  various  internal  operating  expenses.  The 
Postal  Service  tests,  approves  and  monitors  these  meters,  but  does  not  regulate 
their  pricing  or  advise  the  public  about  which  manufacturer  to  choose.  Currently, 
there  are  four  authorized  meter  manufacturers  and  we  encourage  customers  to  com- 
pare service  and  pricing  options.  As  new  meters  and  technology  are  introduced  by 
these  and  other  manufacturers  who  may  enter  the  marketplace,  we  would  expect 
customers  to  get  better  value  for  their  money.  For  example,  in  November  1994  a 
new  remote  set  meter  using  the  first  thermal  printing  technology  approved  by  the 
USPS  was  introduced.  We  anticipate  that  three  or  four  additional  innovative  meter 
products  will  be  available  to  meter  users  in  the  near  future.  The  Postal  Service  sup- 
ports technological  advances  since  they  ultimately  stimulate  competition  and  that 
is  a  benefit  to  our  customers. 

Question  14A.  GAO  reported  that  the  Postal  Service's  automation  program  is  pro- 
ducing less  and  taking  longer  to  implement  than  anticipated.  The  project  has  been 
underway  for  about  12  years,  and  the  Service's  investment  in  automation  equipment 
will  total  about  $5  billion.  Few  would  argue  against  the  benefits  of  automation  when 
compared  to  manual  methods  of  sorting  mail.  However,  the  Postal  Service  has  been 
unable  to  significantly  reduce  its  workforce  over  the  past  12  years  and  labor  costs 
continue  to  run  about  82  percent  of  total  operating  cost — the  same  as  25  years  ago. 
What  do  you  see  as  the  current  role  and  purpose  of  automation  in  the  Postal  Serv- 
ice? If  not  to  reduce  labor  costs,  what  is  automation's  purpose?  What  has  been  your 
personal  involvement  in  directing  and  supporting  the  automation  efforts? 

Answer.  The  role  of  automation  has  always  been  to  help  the  Postal  Service  to  con- 
trol its  labor  costs,  while  helping  to  improve  service  where  possible.  Growth  in  mail 
volume  and  in  the  number  of  locations  to  which  we  deliver,  along  with  inflation  in 
the  general  economy  which  impacts  our  costs,  make  it  unreasonable  to  expect  total 
labor  costs  to  be  reduced.  Since  1989  we  have  achieved  costs  savings/avoidance  of 
between  2.4  and  5  billion  dollars  in  processing  and  delivery  operations  impacted  by 
automation.  The  range  depends  on  whether  one  considers  only  direct  distribution 
costs  or  includes  allied  labor  costs. 

The  key  elements  in  directing  and  supporting  the  automation  efforts  include  mak- 
ing and  supporting  strategic  decisions  regarding  equipment  investments,  operational 
changes  in  implementation  of  programs  such  as  Remote  Bar  Code  Sorting  and  De- 
livery Point  Sequencing,  and  requests  for  changes  in  rates  and  mail  classification. 
Postmaster  General  Marvin  Runyon's  contribution  to  these  decisions  is  based  on  his 
understanding  of  the  needs  of  postal  customers,  and  on  his  experience  in  working 
with  automated  manufacturing  processes  at  Ford  and  Nissan. 

Question  14B.  In  your  view,  why  has  automation  not  had  the  impact  on  the 
workforce  that  was  expected? 

Answer.  Automation  has  had  a  substantial  impact  on  the  workforce.  From  1989 
to  1992  more  than  50,000  career  employees  were  taken  off  the  roles  through  attri- 
tion. There  was  a  reduction  of  42  million  work  hours  in  direct-distribution  labor  in 
the  same  period,  equivalent  to  22,000  positions  in  automation-related  activities 
alone.  These  declines  occurred  despite  a  weighted  mail  volume  growth  of  3.8  per- 
cent. Then,  1992  and  1994,  weighted  mail  volume  grew  by  6.2  percent  and  delivery 
points  by  2.8  percent.  Without  automation,  these  factors  alone  would  have  meant 
a  workload-generated  increase  of  45,000  equivalent  positions.  The  bottom  line  is 
that,  while  career  employment  stood  at  778,000  in  1989,  at  the  end  of  Fiscal  Year 

1994  it  had  been  reduced  to  729,000,  quite  significant  in  the  context  of  the  above 
mentioned  workload  increases. 

Question  14C.  What  is  the  Service's  current  strategy  for  controlling  the  growth 
and  cost  of  the  postal  workforce? 

Answer.  The  Postal  Service  employs  many  strategies  for  controlling  the  growth 
and  cost  of  the  postal  workforce.  While  the  individual  strategies  are  too  numerous 
to  mention  here,  they  fall  into  three  basic  categories: 

Automation  Program. 

The  automation  program  is  critical  to  achieving  productivity  improvements.  Pro- 
ductivity improvements  driven  by  automation  act  to  constrain  growth  in  work  hours 
caused  by  workload  increases.  Current  plans  call  for  expansion  of  the  existing  auto- 
mated environment  from  6,148  pieces  of  equipment  in  place  at  the  end  of  March 

1995  to  over  14,000  pieces  of  equipment  when  the  system  is  complete  three  years 
from  now.  Successful  implementation  of  the  entire  automated  system  will  create  ad- 
ditional opportunities  for  cost  avoidance  or  savings. 


In  order  to  be  successful,  the  automation  program  must  be  supported  by  effective 
complement  planning  and  workforce  management.  The  Workforce  Planning  and 
Service  Management  Department  was  created  to  report  on  and  improve  service, 
while  insvuing  maximum  utilization  of  the  workforce.  This  group  is  working  to  pro- 
vide field  managers  the  tools  needed  to  effectively  manage  the  workforce  in  an  in- 
creasingly complex  environment. 

Methods  Improvements 

While  the  automation  program  is  important  in  controlling  costs,  it  is  by  no  means 
the  only  strategy  employed  by  the  Postal  Service  to  constrain  workforce  growth. 
Other  methods  improvements,  unrelated  to  automation,  are  identified  and  imple- 
mented every  year.  Targeted  work  hour  savings  for  these  improvements  are  re- 
moved from  operating  budgets  of  field  units  to  ensure  that  the  expected  benefits  are 

Labor  Relations 

Success  in  controlling  the  growth  of  the  workforce  is  in  part  dependent  upon  in- 
creasing the  flexibility  of  the  workforce.  As  a  result  of  the  1990  labor  negotiations, 
the  Postal  Service  added  a  new,  lower  cost  level  of  employee  called  a  transitional 
employee.  Transitional  employees  are  compensated  at  the  lowest  rate  of  pay  for  ca- 
reer employees  of  the  same  level,  and  receive  reduced  benefits.  This  category  of  em- 
ployee was  created  to  be  used  in  positions  which  were  targeted  for  elimination  due 
to  automation.  In  addition,  in  November  1993,  the  Postal  Service  signed  a  Memo- 
randum of  Understanding  with  the  APWU  which  expands  the  use  of  transitional 
employees  to  the  Remote  Encoding  Centers  (RECs).  Under  this  agreement,  the  Post- 
al Service  can  operate  the  RECs  with  70  percent  transitional  employee  work  hours 
and  30  percent  career  employee  work  hours,  an  arrangement  that  provides  signifi- 
cant reductions  in  the  average  cost  of  a  work  hour  at  each  REC. 

Effective  use  of  non-career  employees  is  also  important  in  controlling  the  cost  of 
the  workforce.  In  addition  to  transitional  employees,  the  Postal  Service  employs  an- 
other type  of  non-career  employee  called  a  casual  employee.  Casual  employees  are 
compensated  at  a  lower  rate  of  pay  than  career  employees  and  do  not  receive  bene- 
fits. These  employees  are  used  by  the  Postal  Service  in  positions  which  are  tem- 
porary in  natxire  and  where  the  job  does  not  require  substantial  training  as  a  pre- 
requisite to  good  performance.  As  of  the  end  of  March  1995,  transitional  and  casual 
employees  made  up  about  7.2  percent  of  the  Postal  workforce. 

Question  14D.  With  the  Postal  Service's  labor  costs  running  about  82  percent  of 
the  total  operating  costs,  what  items  are  left  in  the  18  percent  that  can  be  controlled 
by  the  Postal  Service?  Do  you  plan  to  address  those  items  in  your  cost  control  ef- 

Answer.  Actually,  our  labor  costs  run  about  80  percent  of  total  costs.  The  remain- 
ing items  include  transportation,  depreciation,  rent,  fuel  and  utilities,  bmlding  and 
vehicle  maintenance  along  with  supplies  and  services.  To  a  certain  degree,  they  can 
all  be  controlled  by  the  Postal  Service  and  we  do  address  them  in  our  cost  control 
efforts.  However,  there  is  a  base  level  below  which  costs  cannot  be  reduced  without 
adverse  consequences.  For  instance,  transportation  costs  can  be  (and  are)  reduced 
through  competitive  bidding  of  contracts  and  realignment  of  routes,  but  service  will 
suffer  if  cost  becomes  the  only  consideration.  Likewise,  imprudent  reductions  in 
building  and  vehicle  maintenance  could  endanger  employees  and  customers,  poten- 
tially resulting  in  higher  accident  costs  in  the  fiiture. 

Transportation  is  one  of  the  Postal  Service's  largest  expenses.  One  of  the  more 
significant  single  cost-reduction  efforts  in  this  area  took  place  a  few  years  ago.  In 
1989,  the  Postel  Service  negotiated  a  uniform  air  contract  rate  for  mail  carried  via 
commercial  airlines.  This  was  a  substantial  improvement  over  the  previous  seg- 
ment^system  contracts.  It  allowed  the  Postal  Service  to  improve  the  routing  of  mail, 
while  at  the  same  time  reducing  costs  by  about  $100  million  per  year. 

The  Postal  Service  continually  undertakes  efforts  to  reduce  its  nonpersonnel  costs. 
We  are  a  leader  in  the  implementation  of  environmentally  sound  operating  policies, 
which  in  the  long-run,  reduce  expenses.  The  Postal  Service  operates  the  nation's 
largest  fleet  of  alternative  fuel  vehicles,  which  have  lower  annual  operating  and 
maintenance  costs  than  gasoline-powered  vehicles.  We  are  also  committed  to  reduc- 
ing the  cost  of  operating  our  39,000  facilities  through  energy  conservation  programs. 

Another  example  of  our  cost  reduction  efforts  is  ovir  stamp  acquisition  process. 
The  Postal  Service  has  achieved  significant  savings  by  contracting  with  a  number 
of  private-sector  printers  to  produce  postage  stamps. 

In  short,  the  Postal  Service  constantly  strives  to  minimize  its  nonpersonnel  costs, 
so  long  as  doing  so  does  not  sacrifice  customer  service,  safety  or  result  in  higher 
repair  and  replacement  costs  in  the  fiiture.  Consequently,  our  challenge  is  to  control 


costs,  through  business  process  redesign,  in  a  manner  that  avoids  these  undesired 

Question  ME.  The  Postal  Service  plans  to  ultimately  have  268  remote  barcoding 
sites  to  handle  letters  that  optical  character  readers  cannot  read.  I  have  seen  sev- 
eral news  items  from  around  the  nation — Duluth,  Minnesota;  Davenport,  Iowa;  and 
Nashua,  New  Hampshire  to  name  a  few — announcing  the  opening  of  some  of  these 
new  barcoding  sites.  How  do  you  square  the  additional  hiring  required  for  these 
sites  with  the  need  for  cost  control? 

Answer.  It  should  first  be  noted  that  the  268  sites  referenced  pertain  to  processing 
and  distribution  centers  (P&DCs)  projected  for  the  entire  Remote  Bar  Coding  Sys- 
tem (RBCS)  network.  The  sites  mentioned  in  this  question  are  locations  for  new  re- 
mote encoding  centers  (RECs).  The  RECs  perform  the  data  entry  work  to  resolve 
images  transmitted  from  the  P&DCs.  There  will  be  no  more  than  75  RECs  nation- 
wide. The  data  conversion  operators  (DCOs)  hired  to  perform  the  image  resolution 
work  in  the  RECs  are  low  cost  level  4  positions.  More  importantly,  70  percent  of 
the  DCO  workhours  will  be  performed  by  transitional  employees  who  will  not  re- 
ceive the  benefits  package  afforded  career  postal  employees.  Only  30  percent  of  the 
workhours  will  be  attributed  to  career  employees.  With  the  advent  of  future  tech- 
nology such  as  modifications  to  Multi-Line  Optical  Character  Readers  (MLOCRs)  to 
increase  read  rates  and  remote  computer  reading  which  will  significantly  decrease 
workhour  requirements  at  the  RECs,  we  will  have  flexibility  to  easily  reduce  our 
complement  through  the  reduction  of  transitional  employees. 

Also,  the  additional  hiring  at  the  RECs  enables  significant  reduction  of  workhours 
at  the  P&DCs.  The  images  resolved  at  the  REC  enables  additional  volume  to  remain 
in  automated  operations  versus  higher  cost  mechanized  and  manual  operations.  It 
further  enables  greater  volumes  presented  to  carriers  in  delivery  point  sequenced 
order  which  results  in  reduced  carrier  workhours. 

Question  14F.  As  originally  planned,  your  Remote  Bar  Coding  facilities  were  to 
be  staffed  by  contract,  non-postal  employees.  You  later  altered  that  plan  and 
reached  agreements  with  your  unions  to  utilize  career  postal  employees  at  these 
sites.  What  has  been  the  positive  and  negative  changes  you  have  seen  as  a  result 
of  your  decision? 

Answer.  Approximately  70  percent  of  the  workhours  in  the  remote  encoding  cen- 
ters will  be  performed  by  transitional  employees.  Only  30  percent  will  be  attributed 
to  career  employees.  This  gives  the  Postal  Service  a  great  deal  of  flexibility  in  the 
workforce  and  a  labor  cost  structure  that  makes  RBCS  profitable.  The  ratio  of  70 
percent  transitional  workhours  versus  30  percent  career  workhours  reduces  our  key- 
ing costs  by  over  30  percent  of  that  required  using  aU  career  employees. 

Implementation  of  Postal  RECs  has  gone  well  and  is  producing  some  very  positive 
results.  For  example,  our  facility  costs  are  less  than  planned  and  productivity  of  the 
keying  operation  is  greater  than  planned.  Keying  rates  are  currently  approximately 
10  percent  higher  than  the  rates  used  in  the  decision  analysis  report  (DAR)  which 
justified  the  equipment  expenditures  and  approximately  25  percent  higher  than  the 
targets  agreed  upon  in  the  memorandum  of  understanding  (MOU)  with  the  APWU. 
Also,  the  management  and  administrative  overhead  in  the  RECs  is  less  than 
planned  when  compared  with  the  DAR. 

The  MOU  also  provided  the  opportunity  to  move  ahead  rapidly  and  avoid  further 
delays  in  the  program.  Delays  would  certainly  have  been  incurred  had  we  gone 
through  the  competitive  process  to  select  contractors  to  provide  the  image  keying 
services.  The  MOU  itself  is  viewed  as  a  landmark  agreement  in  the  relationship  be- 
tween the  Postal  Service  and  the  APWU.  It  establishes  a  relationship  built  on  mu- 
tual trust  and  a  determination  to  explore  and  resolve  issues  jointly. 

On  the  negative  side  of  using  postal  employees  at  the  RECs  would  be  a  cost  com- 
parison. It  is  somewhat  more  expensive  than  contractor  keying. 

Question  14G.  How  has  the  Postal  Service  been  able  to  extricate  itself  from  the 
contracts  it  had  already  entered  into  for  the  contracted  sites? 

Answer.  The  keying  services  contracts  were  awarded  as  two  year  contracts  with 
a  non-guaranteed  two  year  option  period.  In  some  cases,  the  contracts  were  termi- 
nated at  the  end  of  the  base  two  year  period  and  in  other  cases  contracts  will  nun 
through  the  end  of  the  fiill  two  year  option  period.  However,  in  most  cases,  the  con- 
tracts will  be  terminated  for  convenience  at  some  point  during  the  two  year  option 
period.  The  termination  for  convenience  clause  is  necessary  to  avoid  several  con- 
tracts ending  at  the  same  time.  Because  of  the  complexity  involved  with 
transitioning  of  contractor  sites,  the  need  to  protect  service  at  the  affected  P&DCs, 
and  the  management  support  required,  it  is  necessary  to  spread  these  termination 
dates  over  the  entire  deployment  time  frame. 

Question  14H.  How  many  of  these  facilities  do  you  presently  have  up  and  running, 
and  what  is  the  total  number  of  employees  working  at  these  facilities? 


Answer.  There  are  presently  16  postal  remote  encoding  centers  (RECs).  This  in- 
cludes two  RECs  which  were  previously  contract  operations  which  we  converted  to 
postal  RECs.  There  are  approximately  6200  employees  at  these  RECs.  On  April  1, 
1995,  we  are  converting  another  contractor  operation  to  a  postal  REC.  This  will  re- 
sult in  an  additional  400  postal  employees.  Therefore,  after  April  1,  1995,  there  will 
be  17  RECs  employing  approximately  6600  employees.  It  should  be  noted  that  while 
there  are  approximately  6600  employees  on  the  rolls  70  percent  of  all  the  work 
hours  attributable  to  these  employees  are  performed  by  transitional  employees.  Fur- 
ther approximately  70  percent  of  the  transitional  employees  are  only  working  either 
4  or  6  hours  per  day. 

Question  141.  Given  that  some  of  the  automation  work  in  question  (i.e.,  remote 
barcoding  of  letter  mail)  is  being  done  by  contract  employees  and  some  is  being  done 
by  postal  employees,  is  the  Postal  Service  comparing  the  cost  and  productivity  of 
the  alternatives  (government  versus  contract)?  If  not,  what  would  be  the  pros  and 
cons  of  such  a  comparison? 

Answer.  The  Postal  Service  is  not  comparing  the  cost  and  productivity  of  the  al- 
ternatives in  a  formal  manner.  We  are  not  doing  this  because  the  decision  to 
postalize  the  keying  operation  was  made  in  November  1993.  This  decision  was  for- 
malized in  the  memorandum  of  understanding  signed  at  that  time.  For  that  reason 
it  is  viewed  as  irreversible. 

It  should  be  noted  that  while  we  are  not  formally  tracking  productivity  in  a  com- 
parative analysis,  the  productivity  in  the  postal  RECs  is  already  exceeding  expecta- 
tions and  is  continuing  to  rise.  Based  on  all  information  available,  it  is  approxi- 
mately equal  to  the  productivity  at  the  contractor  sites  which  have  been  in  oper- 
ation for  a  much  longer  period  of  time. 

As  far  as  the  benefits  or  negatives  of  a  formal  cost  and  productivity  analysis,  it 
simply  would  provide  information  on  the  subject.  We  expect  it  would  reveal  similar 
productivity  with  costs  slightly  favoring  the  contract  operation. 

Question  14J.  I  know  that  "address  hygiene"  is  an  important  topic  to  the  Postal 
Service  now  and  that  re-training  postal  customers  to  remove  the  comma  between 
the  city  and  state  is  an  important  task  for  you.  Please  explain  the  efforts  you  are 
making  in  this  area.  Are  you  having  success  with  the  pubUc  or  are  you  having  to 
re-evaluate  the  equipment? 

Answer.  The  proper  formatting  of  addresses  continues  to  be  an  important  require- 
ment for  the  automated  processing  of  mail;  however,  punctuation  is  no  longer  a 
problem.  We  are  making  steady  progress  in  how  the  mail  of  individual  customers 
is  handled.  Our  automated  equipment  has  been  able  to  read  addresses  with  a 
comma  between  city  and  state  tor  several  years.  The  remote  barcoding  of  mail  helps 
automate  maU  that  does  not  meet  addressing  or  other  automation  standards.  But 
we  are  not  just  looking  at  technology  for  solutions  to  increase  the  amount  of  auto- 
mation compatible  mau. 

Customers  are  more  knowledgeable  today  about  address  requirements  as  a  result 
of  such  programs  as  our  "Correct  Address  Notification"  which  is  in  its  third  year 
of  operation.  This  program  involves  sending  out  direct  maihngs  to  households  as 
well  as  businesses,  giving  them  their  unique,  complete  mailing  address  and  explain- 
ing that  by  using  a  proper  address  they  can  improve  their  delivery  service.  Under 
this  program  thus  far,  twenty  miUion  mailpieces  have  been  delivered  on  a  phased 
basis.  To  cite  additional  initiatives  for  improving  the  mailbase,  our  Postal  Business 
Centers  offer  a  service  whereby  customers  can  have  their  mailing  lists  converted  to 
ZIP+4  and  standardized  addresses.  These  same  Postal  Business  Centers  also  pro- 
vide customers  with  proper  formats  for  business  and  courtesy  reply  mail.  We  have 
technical  experts  available  in  these  facilities  who  can  advise  customers  on  proper 
addressing  as  well  as  other  requirements  for  preparing  mailings  so  they  can  be  proc- 
essed on  postal  automation.  Through  the  Business  Partners  program  in  1994,  Postal 
Business  Centers  reached  out  to  over  9,000  maihng  industry  vendors  to  educate 
them  on  addressing  and  mailpiece  design  standards.  Since  each  vendor  has  many 
small  business  customers,  we  achieve  greater  penetration  of  our  customer  base  and 
the  impact  on  mailbase  addressing  and  mailpiece  quaUty  is  amplified.  Yet  another 
example  of  our  broad  and  diverse  approach  to  upgrading  addressing  quality,  is  the 
recent  reclassification  proposals  which  include  a  requirement  that  customers  provide 
proof  they  have  used  proper  addresses  for  discounted  rate  maihngs.  Previously,  only 
automation  rate  mailings  had  to  meet  this  requirement. 

Question  15.  You  entered  into  two  agreements  in  November  1993  with  the  Presi- 
dent of  the  American  Postal  Workers  Union,  one  of  which,  as  noted  in  the  previous 
question,  gave  automation  jobs  to  postal  workers  rather  than  to  contract  employees. 
This  agreement,  I  understand,  increased  the  cost  of  the  services  to  the  Postal  Serv- 
ice by  at  least  $3  billion  over  the  life  of  the  project.  The  other  agreement  was  for 
cooperation  of  the  union  with  the  Postal  Service  in  dealing  with  service,  budget,  and 


other  issues.  Yet,  the  service  and  the  Union  in  November  1994  could  not  agree  on 
a  new  contract,  and  the  issues  apparently  will  again  be  decided  by  a  third  party. 
What  are  your  plans  now  for  dealing  with  the  Union  and  attempting  to  get  some 
basic  agreements  on  the  changes  that  both  the  Postal  Service  and  GAO  say  we 

Answer.  Following  the  agreement  mentioned  above,  the  Postal  Service  and  APWU 
established  12  committees  to  address  various  issues  in  the  implementation  of  the 
agreement.  These  committees  were  extremely  successful,  resolving  all  problems 
raised  to  date.  This  landmark  agreement  has  carried  over  into  other  areas  of  our 
relationship,  and  has  allowed  us  to  resolve  other  long-standing  issues  without  third 
party  intervention. 

The  fact  that  we  could  not  come  to  finality  on  a  new  collective  bargaining  agree- 
ment is  disappointing,  but  should  not  be  viewed  as  the  end  of  our  cooperative  work- 
ing relationship  or  a  failiu"e  of  our  commitment.  The  APWU  has  been  unable  to 
agree  to  an  economic  package  that  meets  the  Postal  Service's  needs  for  restraint  in 
wages  and  compensation.  Thus,  collective  bargaining  is  at  impasse.  However,  we 
continue  to  work  together  in  attempting  to  resolve  workplace  issues. 

Question  16.  You  mention  the  positive  momentum  and  the  great  job  in  delivering 
mail.  However,  can  you  comment  on  the  present  morale  of  the  workforce?  Further, 
what  kind  of  message  are  you  sending  when  Postal  Career  Executive  Service 
(PCES)  employees  receive  a  three  to  10  percent  merit  increase  and  Executive  and 
Administrative  Schedule  (EAS)  employees  are  given  a  .6  percent  increase? 

Answer.  Change  in  the  Postal  Service,  as  in  many  private  sector  organizations, 
is  occurring  rapidly  and  it  is  recognized  that  this  can  have  a  negative  impact  on 
morale.  While  there  is  no  single  measure  for  assessing  this,  our  most  recent  Em- 
ployee Opinion  Survey  (EOS)  indicates  that  there  has  been  no  decline  in  our  em- 
ployees' assessment  of  how  they  are  being  treated.  In  fact,  in  the  majority  of  loca- 
tions, our  EOS  index  improved.  Recognizing  the  apprehension  created  by  change, 
every  effort  is  being  made  to  keep  employees  informed  and  to  include  them  in  the 

Regarding  the  differences  in  pay  actions  between  PCES  and  EAS  employees,  the 
facts  tell  quite  a  different  story  from  what  you  have  been  told.  For  FY  1994  perform- 
ance, the  vast  majority  of  PCES-I  executives  received  a  lump  sum  cash  payment 
of  1.3  percent  under  our  executive  incentive  program.  The  awards  ranged  from  0.0 
percent  for  over  two  dozen  poor  performers  to  12. 1  percent  for  only  ten  executives. 
There  were  no  general  or  COLA  increases  granted  to  any  PCES-1  executive  for  FY- 

During  the  same  period,  EAS  employees  received  a  2.0  percent  general  increase 
to  basic  salary,  and  two  COLA  increases  which  averaged  a  total  of  1.3  percent.  For 
FY  1994  performance,  the  EAS  merit  pay  program  provided  average  increases  of  0.8 
percent  with  a  maximum  award  of  2.8  percent  (merit  awards  were  paid  as  lump 
sums  for  those  at  the  maximum  of  their  pay  grades).  On  average,  therefore,  basic 
salary  increases  for  EAS  employees  totaled  4.1  percent,  which  are  permanent  in- 
creases in  basic  salary  that  continue  into  the  future,  and  also  increase  the  value 
of  retirement,  Ufe  insurance,  premium  pay,  and  leave  benefits.  In  addition  to  their 
basic  salary  adjustments,  EAS  employees  received  a  cash  payment  under  a  group 
incentive  program,  Striving  for  Excellence  Together.  These  ranged  from  0  to  $365, 
with  an  average  pa3Tnent  of  $82. 

Question  1 7A.  You  said  that  there  are  areas  to  focus  on  in  order  to  make  the  Post- 
al Service  more  businesslike  and  competitive  for  the  American  people.  How  would 
you  fix  the  arbitration  Process? 

Answer.  Eliminating  or  limiting  use  of  arbitration  to  settle  our  differences  regard- 
ing local  work  place  disputes  would  make  "the  Postal  Service  more  businesslike.  It 
should  be  replaced  with  a  process  that  encourages  the  parties  to  take  more  respon- 
sibility for  its  decisions.  Aiiy  such  process  should  also  be  structured  to  encourage 
problem-solving  at  the  level  at  which  the  problem  arose.  If  the  local  parties  can't 
agree  on  how  the  contract  should  be  applied,  a  speedy  final  resolution  of  the  dispute 
should  be  available.  We  would  like  to  accomplish  this  through  several  avenues: 
elimination  of  the  step  in  the  grievance  procedure  at  the  intermediate  level,  alter- 
native dispute  resolution  such  as  mediation,  and  increased  joint  training  at  all  lev- 

Question  17B.  In  your  view  does  an  outside  arbitrator  represent  an  impartial  deci- 
sion-maker or  does  it  represent  an  outside,  meddlesome  intrusion? 

Answer.  There  are  times  when  an  arbitrator  provides  the  impartial  insight  nec- 
essary to  resolve  a  dispute,  especially  those  jurisdictional  disputes  that  involve  man- 
agement with  more  than  one  union.  In  most  cases,  however,  an  arbitrator's  decision 
leaves  one  side  happy  and  the  other  side  bitter.  When  this  happens  the  labor-man- 
agement climate  suffers.  When  arbitrators  offer  modification  decisions  it  can  leave 


both  sides  feeling  less  than  satisfied,  but  it  may  indicate  that  with  a  little  help  a 
compromise  could  have  been  reached.  Had  the  parties  reached  that  modification 
through  mediated  compromise,  neither  would  likely  feel  slighted. 

Question  17C.  How  do  you  want  to  improve  the  employee  dispute  resolution  proc- 
ess? Have  you  discussed  this  with  the  employee  organizations  and  unions?  What 
were  their  responses? 

Answer.  The  Postal  Service  and  the  American  Postal  Workers  Union  recognize  the 
need  to  take  more  responsibility  for  our  decisions.  To  that  end,  we  are  exploring  an 
alternative  dispute  resolution  process  that  will  enable  the  parties  at  the  local  level 
to  resolve  local  disputes.  We  believe  this  will  strengthen  workforce  relationships,  im- 
prove oiu"  culture  and  the  way  we  treat  each  other,  and  create  a  greater  sense  of 

With  the  National  Association  of  Letter  Carriers,  we  have  spent  much  time  ex- 
ploring this  question,  both  informally  and  as  a  topic  of  collective  bargaining.  We 
continue  to  work  toward  a  mutual  understanding  to  improve  the  system. 

Question  18.  Mr.  Runyon,  would  you  expand  on  how  the  rate-setting  process  can 
be  simplified  while  maintaining  appropriate  oversight — making  the  process  faster 
and  much  less  expensive  while  making  the  prices  more  market-based  and  competi- 
tive? Would  the  small  and  individual  mailer  have  the  same  protection  that  they 
have  now  under  your  proposal? 

Answer.  The  Postal  Service  has  requested  the  Postal  Rate  Commission  initiate  a 
rulemaking  to  consider  draft  rules  presented  by  the  Postal  Service  to  implement  a 
broad  array  of  recommendations  for  simplifjdng  the  rate-setting  process  for  competi- 
tive services.  A  copy  of  the  petition  is  provided  as  Attachment  IV.  These  proposals 
maintain  the  current  role  of  the  Commission  in  ensxuing  that  the  views  of  inter- 
ested parties  are  heard  and  independently  evaluated  by  the  Commission  before  it 
issues  its  recommended  decision  to  the  Governors  of  the  Postal  Service.  A  simpler 
process  will  benefit  smaller  mailers  by  reducing  the  expenses  entailed  in  their  par- 
ticipation in  the  process. 

Question  19.  You  mention  in  your  prepared  statement  that  the  paperwork  for  the 
last  rate  case  filled  50  boxes  and  took  more  than  a  year.  However,  you  do  not  men- 
tion that  the  Postal  Rate  Commission  completed  this  last  case  well  short  of  the  ten- 
month  requirement.  In  addition,  you  do  not  mention  in  your  testimony  that  rec- 
ommendations for  making  rate  proceedings  more  responsive  to  the  Postal  Service — 
made  by  the  Joint  Task  Force  on  Postal  Ratemaking — have  been  awaiting  action  by 
the  Postal  Service  since  your  arrival  as  Postmaster  General.  What  has  been  the  dif- 
ficulty in  pursuing  some  of  those  recommendations,  which  I  understand  could  have 
been  implemented  without  new  legislation? 

Answer.  In  Docket  No.  R94-1,  the  Commission  was  able  to  issue  its  Rec- 
ommended Decision  approximately  nine  months  after  the  filing  of  the  request,  five 
weeks  before  the  mandated  completion  date.  Including  case  preparations,  however, 
which  began  in  the  fall  of  1993  and  which  are  necessary  to  comply  with  the  Com- 
mission's filing  requirements,  the  elapsed  time  was  over  a  year  from  when  the  Post- 
al Service  determined  that  new  rates  were  necessary  until  the  implementation  of 
those  new  rates.  It  should  also  be  recognized  that  the  Commission  was  able  to  com- 
plete its  deliberations  in  Docket  No.  R94-1  in  a  shortened  period  only  because,  in 
an  effort  to  achieve  settlement,  the  Postal  Service  and  the  parties  limited  the  scope 
of  the  issues  to  merely  a  portion  of  those  normally  litigated  in  a  general  rate  pro- 
ceeding. This  allowed  the  entire  case  to  be  moved  along  on  an  expedited  schedule, 
eliminating  approximately  one  month  from  the  proceedings. 

The  Joint  Task  Force  on  Postal  Ratemaking  included  at  least  two  types  of  propos- 
als in  its  report;  those  pertaining  to  general  rate  proceedings  dealing  with  rates  for 
all  categories,  and  those  pertaining  to  more  limited  cases  dealing  with  rates  for 
smaller  sets  of  mail  categories.  With  regard  to  the  Task  Force's  primary  rec- 
ommendation regarding  general  rate  proceedings,  the  Commission  issued  draft  rules 
in  the  summer  of  1992.  The  Postal  Service  did  not  find  these  draft  rules  attractive, 
but  presented  its  own  alternative  proposal  on  how  general  rate  cases  could  be  im- 
proved. The  Commission,  in  turn,  was  unwilling  to  adopt  that  proposal. 

With  regard  to  recommendations  regarding  more  limited  cases,  the  Postal  Service 
has  for  some  time  been  working  to  convert  the  Task  Force  proposals  into  actual 
draft  rules.  This  effort  was  disrupted  by  the  Postal  Service's  internal  restructuring 
in  1992-1993,  and  by  the  pendency  of  Docket  No.  R94-1,  on  which  the  attention 
of  the  Postal  Service  and  the  Commission  has  been  focused  over  the  past  year.  How- 
ever, the  Postal  Service  recently  petitioned  the  Commission  to  initiate  a  rulemaking 
on  draft  proposals  regarding  more  limited  cases. 

Question  20.  I  know  that  as  a  businessman  you  have  strong  views  regarding  the 
Postal  Rate  Commission  and  the  restrictions  the  present  ratemaking  process  places 
on  your  abilities  to  compete.  However,  I  would  like  you  to  elaborate  on  how  postal 


customers  would  be  protected  without  the  Postal  Rate  Commission  and  its  proceed- 

Answer.  If,  h3T)othetically,  the  Postal  Rate  Commission  were  eliminated  from  the 
ratemaking  process,  it  should  still  be  possible  to  protect  the  interests  of  postal  cus- 
tomers. It  should  be  recognized  that  the  Governors  of  the  Postal  Service  are  ap- 
pointed to  serve  the  public  interest  generally,  and  are  not  to  be  representatives  of 
any  specific  interests  using  the  Postal  Service.  As  their  compensation  is  set  by  stat- 
ute, they  have  no  financial  incentive  to  pursue  any  interests  other  than  the  one  they 
were  appointed  to  serve.  The  Postal  Service  is  unaware  of  any  other  reason  why 
they  would  fail  to  fulfill  their  duty.  It  is  therefore  unclear  why  there  is  any  per- 
ceived need  to  protect  postal  customers  beyond  the  oversight  of  the  Governors. 

If,  however,  some  other  form  of  institutional  protection  were  desired,  it  need  not 
involve  the  anomaly  of  having  one  executive  branch  body  regulate  another.  In  its 
1968  report,  to  cite  one  example,  the  Kappel  Commission  recommended  that  rate 
proposals  be  evaluated  by  an  internal  body  of  technical  examiners  responsible  only 
to  tne  directors  of  the  postal  corporation.  The  postal  directors  would  then  have  acted 
on  the  recommendations  of  the  technical  panel,  subject  to  disapproval  by  a  concur- 
rent resolution  of  Congress.  I  am  sure  that  other,  even  more  creative  ways  might 
be  found  to  safeguard  3ie  interests  of  postal  customers  in  a  restructured  ratemaking 

Question  21.  How  far  along  are  you  in  developing  the  electronic  postmark?  What 
is  your  estimated  cost  for  mis  development  and  will  such  a  postmark  eliminate 
some  of  the  legal  and  privacy  ramifications  which  will  develop  as  e-mail  becomes 
more  sophisticated? 

Answer.  We  have  been  Alpha  testing  (phase  I)  the  Electronic  Postmark  for  a  pe- 
riod of  six  months.  We  will  begin  Beta  testing  (phase  II)  the  Electronic  Postmark 
with  the  FM  and  Dow  Chemical  in  early  April.  This  service  will  complete  the  initial 
Beta  testing  in  July  1995. 

The  Electronic  Postmark  is  only  one  of  the  many  services  provided  by  Postal  Serv- 
ice's Electronic  Commerce  Services  and  we  estimate  it  will  take  $25.5  million  in 
R&D  costs  to  bring  the  fuU  package  of  services  to  fiill  deployment. 

The  Electronic  Postmark  adds  value  in  several  ways  that  address  many  of  the 
legal  and  privacy  issues  associated  with  e-mail.  First,  it  proves  the  existence  of  a 
message  at  a  particular  point  in  time.  Second,  it  provides  for  the  non-repudiation 
of  content  since  a  trusted  third  party  (i.e.,  the  USPS)  can  attest  that  the  message 
was  not  altered  since  that  point  in  time.  Finally,  it  provides  for  non-repudiation  of 
the  time  of  correspondence. 

Question  22.  Five  years  ago,  the  Rate  Commission  adopted  rules  requested  by  the 
Postal  Service  to  allow  changes  in  Express  Mail  in  90  days.  Why  have  you  not  used 
this  flexibility?  What  is  the  status  of  these  rules? 

Answer.  It  must  be  recognized  that  the  rules  that  now  exist  fall  far  short  of  the 
original  request  of  the  Postal  Service,  which  embodied  much  more  flexibility  and  ex- 
pedition. During  their  promulgation,  the  Postal  Service  identified  the  problems  with 
the  rule  ultimately  adopted,  problems  which  the  Commission  declined  to  correct.  It 
is  also  important  to  note  that  these  rules  may  be  used  only  in  particular  limited 
circumstances,  such  as  when  changes  in  competitor  behavior  necessitate  a  more 
speedy  market  response  by  the  Postal  Service  than  can  be  accomplished  under  the 
normal  rules  governing  rate  changes.  Even  in  these  circumstances,  the  special  Ex- 
press Mail  rules  may  not  be  invoked  during  the  pendency  of  a  normal  rate  proceed- 

Even  with  these  limitations,  however,  the  Postal  Service  supports  the  continued 
existence  of  these  rules.  First,  the  rules  create  the  possibility  of  a  credible  market 
response  by  the  Postal  Service,  a  potential  that  can  be  expected  to  inject  a  greater 
degree  of  competitive  pressure  into  the  market  for  expedited  delivery,  even  if  that 
potential  has  not  yet  been  realized.  Second,  having  worked  hard  to  establish  some 
sort  of  expedited  rule  for  Express  Mail,  the  Postal  Service  was  reluctant  to  let  it 
simply  expire  under  its  sunset  provisions.  Finally,  the  Postal  Service  has  been  care- 
ftilly  monitoring  recent  trends  in  marketing  behavior  by  its  competitors  to  deter- 
mine if  application  of  the  special  rules  may  provide  some  relief  to  the  Postal  Service, 
however  marginal.  The  Commission  recently  extended  the  effective  date  of  the  Ex- 
press Mail  rules,  an  extension  which  was  requested  by  the  Postal  Service. 

Question  23.  In  recognition  of  the  privatization  debate,  the  Postal  Service  devel- 
oped a  Competitive  Services  Task  Force  in  1992  to  recommend  ways  to  service  cus- 
tomers more  efficiently  and  to  be  more  competitive  in  today's  marketplace.  One  hun- 
dred and  eighty-three  recommendations  were  made  such  as  1)  revising  the  Mail 
Manual  and  simpUfying  regulations;  2)  improving  delivery  performance,  standard, 
measures;  3)  controlling  costs;  4)  offering  discounts  and  other  pricing  strategies;  and 
5)  becoming  more  customer-oriented.  How  many  of  the  183  recommendations  are 


fiilly  implemented?  Have  they  made  any  difference  in  your  competitive  ability?  If 
so,  which  ones  have  made  a  difference? 

Answer.  Of  the  183  original  recommendations,  155  were  accepted,  although  about 
one-third  were  somewhat  modified  or  accepted  partially.  Seven  items  are  still  being 
considered  and  21  were  rejected — either  because  the  intent  was  not  clear  or  the 
ideas  did  not  make  good  business  sense. 

It  is  virtually  impossible  to  quantify  the  impact  of  implementing  these  rec- 
ommendations. The  only  meaningfiil  measures  of  competitive  fitness  are  revenue 
growth,  delivery  performance,  and  customer  satisfaction.  Nevertheless,  if  the  major 
themes  of  the  recommendations  are  valid  attributes  of  competitive  fitness,  then  sig- 
nificant progress  has  been  made.  The  five  major  themes  are: 

1.  Simplify  regulations — both  in  language  and  content. 

2.  Improve  deUvery  performance,  service  standards,  and  measurement  sys- 

3.  Commit  to  cost  control  for  rates  stability. 

4.  Develop  pricing  strategies  that  are  more  customer-oriented  (not  necessarily 
lower  rates). 

5.  Become  more  customer  oriented  and  easier  to  do  business  with. 

To  identify  the  "Big  Five."  These  five  recommendations  arguably  have  the  great- 
est impact  on  competitive  fitness: 

1.  Revise  the  Domestic  Mail  Manual  and  simplify  regulations. 

2.  Restructure  the  organization  to  be  more  customer-focused. 

3.  Deploy  more  external  measurement  systems. 

4.  Introduce  more  contemporary  postage  payment  systems. 

5.  Promote  the  value  of  advertising  mail  to  advertisers. 

The  report  has  helped  move  the  entire  organizational  culture  of  the  Postal  Service 
closer  to  the  satisfaction  of  mailers'  needs  and  has  made  a  positive  impact  felt 
throughout  the  entire  organization. 

Question  24A.  In  August  1991,  GAO  recommended  that  the  Postal  Service  system- 
atically develop  data  on  the  use  and  advantages  and  disadvantages  of  its  more  flexi- 
ble procurement  procedures  (e.g.,  pre-qualification  and  large  dollar  commercial  item 
purchases).  What  is  the  status  of  this  effort? 

Answer.  Postal  Service  Purchasing  and  Materials  has  developed  a  plan  for  Inter- 
nal Contracting  Controls  (ICC)  which  includes  tools  to  more  effectively  review  con- 
tracting activities.  One  of  these  tools  is  a  review  guide  that  will  focus  on  output 
measures  of  performance,  policies  and  procedures. 

The  ICC  will  be  used  to  obtain  feedback  in  order  to  identify  areas  of  success  rel- 
ative to  our  "more  flexible"  policies  and  procedures.  We  will  also  identify  "best  prac- 
tices"— including  the  use  of  contracting  officer  discretion — to  be  shared  among  all 
purchasing  activities  in  the  Postal  Service. 

In  specific  areas  such  as  pre-qualification,  our  buyers  continue  to  use  this  con- 
tracting procedure  when,  among  other  things,  we  own  a  building  and  require  new 
construction,  or  when  we  purchase  design/biuld  services. 

As  to  commercial  products:  we  raised  our  simplified  purchasing  ceiling  from 
$50,000  to  $100,000  in  late  1992  so  that  we  could  take  fiirther  advantage  of  the  sup- 
plies and  services  available  on  the  open  market. 

Question  24B.  What  happened  to  an  April  1991  contract  the  Postal  Service  award- 
ed to  study  implementation  of  the  prociu-ement  manual  by  the  Procurement  and 
Supply  Department? 

Answer.  This  study  was  commissioned  by  the  (then)  Procurement  and  Supply  De- 
partment to  study  many  of  the  areas  GAO  was  also  investigating.  Generally,  the 
study  agreed  with  the  results  of  the  GAO  effort,  and  encouraged  the  Postal  Service 
to  take  greater  advantage  of  its  flexible  procurement  poUcies  and  procedures.  Spe- 
cific recommendations  were  under  consideration  by  the  Procurement  and  Supply  De- 
partment when  the  1992  Postal  Service  reorganization  was  announced,  and  the  De- 
partment was  reconstituted  as  the  current  Purchasing  and  Materials  organization. 
Many  of  the  study's  recommendations  are  being  actively  pursued  by  Purchasing  and 

Question  24C.  What  training  has  been  conducted  for  the  procurement  workforce? 

Answer.  The  Postal  Service  has  one  of  the  Federal  Government's  most  extensive 
purchasing  and  material  management  training  and  professional  development  pro- 
grams. During  Fiscal  Year  1994,  the  curriculum's  18  courses  were  accredited  by  the 
American  Council  on  Education  (ACE).  Also  during  the  past  fiscal  year,  nearly  1,100 
employees  attended  classes  in  the  two  disciplines. 

Question  25A.  The  Postal  Service  recently  implemented  a  debit/credit  card  accept- 
ance poUcy.  What  are  your  expectations  for  level  of  use  and  total  revenue  from  such 
transactions?  What  has  been  the  level  of  use  and  revenue  to-date? 


Answer.  The  policy  to  accept  debit/credit  cards  at  Postal  Service  retail  facilities 
was  approved  to  facilitate  customer  satisfaction  and  offer  alternative  payment  op- 
tions to  our  customers.  While  we  included  some  basic  assumptions  in  our  decision 
analysis,  actual  usage  may  vary  significantly  once  we  advertise  and  promote  card 
acceptance  on  a  national  level.  It  is  important  to  note  that  an  activity-based  cost 
study  conducted  for  the  Postal  Service  determined  that  it  is  potentially  less  expen- 
sive per  doUar  processed  to  accept  credit/debit  cards  in  lieu  of  cash  or  checks  for 
retail  transactions. 

We  conducted  a  pilot  study  in  550  locations  in  three  major  market  areas.  Even 
with  limited  advertising  in  tiiose  locations,  the  number  of  card  transactions  grew 
steadily  to  over  50,000  per  month.  From  June  1993  through  February  1995,  we  proc- 
essed in  the  test  area  over  1  million  card  transactions  with  a  value  of  $51  million. 
Assuming  these  results  would  apply  to  33,000  locations,  it  is  estimated  we  would 
process  approximately  $1  bUhon  in  card  activity  annually  once  fully  implemented. 

Question  25B.  Did  prociu-ement  of  the  integrated  retail  terminals  required  by  this 
change  proceed  smoothly?  Please  provide  information  on  how  many  of  these  termi- 
nals are  in  place  and  how  many  more  are  needed. 

Answer.  The  terminals  reqiiired  for  the  NationsBank  contract  (which  are  not  the 
integrated  retail  terminals  used  in  oiu*  post  office  lobbies)  are  slightly  modified  com- 
mercial items.  Our  efforts  to  competitively  contract  for  these  items  proceeded  on 
schedule,  and  we  awarded  this  contract  in  February.  However,  no  terminals  are  yet 
in  place.  It  is  estimated  that  the  Postal  Service  will  deploy  50,000  terminals. 

Question  25C.  A  February  17  Associated  Press  wire  story  said  the  Postal  Service 
awarded  a  $45.8  million  contract  to  NationsBank  to  set  up  a  national  system  for 
post  offices  to  process  credit  and  debit  cards.  The  contract  call  for  installation  of 
50,000  terminals  in  33,000  locations  over  the  next  three  years.  Is  this  the  largest 
contract  the  Postal  Service  has  ever  offered? 

Answer.  No.  In  1986,  the  Postal  Service  awarded  its  largest  contract  to  date.  The 
contract  was  for  development  and  manufacture  of  the  Postal  Service's  long  life  vehi- 
cle (LLV)  and  was  valued  at  $1.8  billion. 

Question  25D.  I  understand  the  request  for  proposal  (RFP)  had  a  30  day  turn 
around  time.  Is  this  30  day  time  standard  for  a  contract  of  this  size?  How  many 
bidders  submitted  proposals?  How  many  bidders  asked  for  extensions?  Was  a  bid- 
der's conference  conducted?  If  so,  was  enough  time  allowed  between  the  conference 
and  contract  due  date  for  bidders  to  receive  clarification  on  technical  issues  in  a 
timely  manner? 

Answer.  The  30  day  proposal  preparation  period  is  standard  when  we  are  con- 
tracting for  a  commercially  available  service,  as  we  were  in  this  case.  Seven  compa- 
nies submitted  offers  in  response  to  the  solicitation;  we  received  one  written  and  one 
oral  request  for  extensions.  The  solicitation  was  issued  on  November  1,  1994,  with 
responses  due  November  30,  1994.  A  pre-proposal  conference  was  held  on  November 
14,  1994. 

Clarifications  and  answers  to  questions  which  arose  at  the  conference,  but  were 
not  then  answered,  were  mailed  to  the  interested  parties  on  November  18.  This 
should  have  provided  all  potential  offerors  enough  time  to  prepare  their  proposals. 

Question  25E.  How  many  bids  were  received?  How  did  these  bids  rate  on  a  tech- 
nical evaluation  in  comparison  to  the  winning  bid? 

Answer.  As  noted  above,  seven  proposals  were  received  in  response  to  the  solicita- 
tion. One  of  the  proposals  was  ranked  technically  higher  than  the  eventual  awardee; 
all  others  were  ranked  technically  lower. 

Question  25F.  Who  was  the  contractor  in  the  pilot  project? 

Answer.  National  Data  Corporation  was  the  contractor  for  the  pilot  project. 

Question  25G.  Is  NationsBank  under  any  duty  to  competitively  bids  its  contracts 
to  subcontractors?  Could  such  a  process  cut  the  contract  costs  for  the  Postal  Service? 
Shouldn't  the  subcontractors  be  determined  prior  to  submission  of  the  bid? 

Answer.  NationsBank  had  fiill  discretion  in  deciding  with  which  companies  it 
would  subcontract.  However,  the  solicitation  specifically  stated  that  the  offered  price 
would  play  an  important  (although  not  the  most  important)  role  in  determining  con- 
tract award,  and  aU  offerors  for  the  prime  contract  were  therefore  encouraged  to  do 
their  best  to  lower  potential  subcontract  costs.  In  this  case,  we  believe  that  the  sub- 
contractor (NaBANCO)  offered  NationsBank  the  lowest  cost  for  the  services  they  of- 
fered to  perform.  In  addition,  the  solicitation  required  the  offerors  to  provide  a  sub- 
contracting plan  showing  the  companies  with  which  they  planned  to  work  during 
the  term  of  this  contract. 

Question  26.  I  understand  that  most  federal  agencies  utilize  a  "competition  advo- 
cate" to  ensure  open  and  fair  competition  for  procurement  as  required  by  the  Com- 
petition and  Contracting  Act  of  1976.  The  "competition  advocate"  has  authority  over 


program  and  contracting  personnel  and  can  delay,  halt,  or  extend  procurement  time 
lines.  Does  the  Postal  Service  utilize  this  program?  If  not,  why? 

Answer.  Because  the  Postal  Service  is  expected  to  operate  in  as  business-like 
manner  as  possible,  Congress,  when  it  passed  the  Postal  Reorganization  Act,  specifi- 
cally exempted  the  Postal  Service  from  a  nvimber  of  laws  that  apply  to  other  agen- 
cies of  the  Executive  Branch.  Operating  under  this  same  philosophy.  Congress  ex- 
empted the  Postal  Service  from  the  Competition  in  Contracting  Act  (CICA).  There- 
fore, the  Postal  Service  does  not  have  a  competition  advocate.  We  do  however,  have 
in-house  protest  procedures  and  our  own  Board  of  Contract  Appeals.  Dissatisfied 
offerors  and  contractors  may  also  seek  relief  from  the  Federal  courts.  Lastly,  we  also 
run  one  of  the  Federal  agencies'  most  aggressive  and  effective  outreach  programs 
to  the  nation's  small,  minority  and  woman-owned  businesses.  While  we  operate 
under  a  standard  of  "adequate  competition,"  rather  than  the  "full  and  open"  com- 
petition standard  mandated  by  CICA,  the  vast  majority  of  our  contracts  are  award- 
ed competitively. 

Question  27.  A  major  automation  contract  in  1992  to  ElectroCom  (for  an  imaging 
process  subsystem)  was  not  invalidated  despite  ethics  violations  of  officials  accepting 
meals  and  travel.  What  is  the  status  of  the  Postmaster  General's  efforts  to:  1)  better 
ensure  Postal  Service  compliance  with  the  prohibition  of  accepting  items  of  value 
from  Service  vendors;  and  2)  direct  the  Designated  Agency  Ethics  Official  to  take 
action  against  those  who  committed  ethics  violations  in  this  case? 

Answer.  In  addition  to  the  ethics-related  activities  mandated  by  Executive  Order 
12731,  the  Postal  Service  developed  all/2  day  training  course  for  all  purchasing- 
related  employees  who  have  been  designated  as  financial  disclosure  filers.  The 
course  is  entitled  "Ethics  and  Standards  of  Conduct  for  USPS  Employees."  In  addi- 
tion, aU  purchasing-related  employees  who  are  not  financial  disclosure  filers  were 
required  to  view  a  one  hour  training  video  entitled  "Ethics  and  You";  496  purchas- 
ing-related employees  attended  the  1  1/2  day  training;  457  employees  took  the  one 
hour  video  training. 

The  Executive  Order  also  requires  that  ethics  update  training  be  given  annually. 
A  2  1/2  hour  training  course  was  developed  and  provided  to  all  financial  disclosure 
filers  at  25  training  sessions  conducted  nationwide. 

Question  28.  Although  only  one  site  was  needed,  the  Postal  Service  purchased  two 
properties  in  Queens,  New  York,  for  $80  million  in  1992.  One  property,  the  Phelps 
Dodge  site,  was  contaminated  with  hazardous  materials.  Subsequently,  the  Postal 
Service  attempted  to  sell  it.  The  Postal  Service  is  still  in  litigation  over  clean-up  of 
the  site.  The  Postal  Inspection  Service  identified  numerous  problems  with  this  con- 
tract. For  example,  the  contract  was  changed  at  the  last  minute  to  remove  any  re- 
course for  the  Postal  Service  to  force  the  seller  to  clean-up  the  site.  No  one  can  de- 
termine who  changed  the  contract.  What  efforts  are  underway  to  resolve  this  con- 
tract? When  do  you  expect  to  resolve  this  situation  and  how? 

Answer.  Various  parts  of  this  question  are  inaccurate  or  incomplete.  The  prop- 
erties were  purchased  in  1986  (the  Phelps  Dodge  site)  and  1987,  not  1992.  Of  the 
combined  purchase  prices,  less  than  $15  million  was  for  the  Phelps  Dodge  site.  We 
negotiated  for  two  vears  with  Phelps  Dodge.  At  some  point,  we  scrapped  the  draft 
and  started  over.  The  later  version  evolved  into  the  sales  contract.  The  contract  was 
not  changed  at  the  last  minute.  It  was  amended  by  mutual  agreement,  to  our  ad- 
vantage, at  the  closing.  The  amendment  required  Phelps  Dodge  to  clean  the  site: 
it  did  not  remove  any  recourse  against  it. 

The  current  Utigation  against  Phelps  Dodge  is  the  best  avenue  available  to  us  to 
resolve  this  dispute.  The  Postal  Service  and  Phelps  Dodge  have  long-standing  and 
fundamental  differences  concerning  Phelps  Dodges  clean-up  responsibilities  under 
the  sales  contract.  Excavation  of  the  hazardous  wastes  ceased  years  ago,  and  Phelps 
Dodge  has  been  attempting  to  placate  the  New  York  State  Department  of  Environ- 
mental Conservation  (NYSDEC),  the  state  agency  overseeing  the  clean-up,  since 
then.  We  have  been  in  litigation  for  three  years.  The  Postal  Service  is  seeking  re- 
scission of  the  contract,  damages,  and  a  court-ordered  clean-up,  alternatively.  The 
judge  has  indicated  that  the  case  will  go  to  trial  in  the  next  few  months.  The  best 
conclusion  would  be  for  the  litigation  to  resolve  the  matter  in  our  favor.  If  it  does 
not,  future  litigation  against  Phelps  Dodge,  and  perhaps  with  NYSDEC,  is  likely. 
We  are  also  working  with  NYSDEC  to  require  it  to  enforce  its  consent  order  with 
Phelps  Dodge,  so  that  the  site  will  be  cleaned  up  sufficiently  to  allow  profitable  re- 
sale. We  believe  that  we  are  protected  both  under  the  contract  and  through  the  con- 
sent order  with  NYSDEC.  It  is  our  view  that  the  long  delays  and  problems  associ- 
ated with  the  site  are  caused  solely  by  the  polluter,  and  that  we  are  utilizing  all 
available  legal  mechanisms  to  ensure  that  the  financial  responsibility  rests  solely 
with  Phelps  Dodge. 


Question  29.  In  1991,  GAO  found  that  the  private  sector  can  be  a  lower  cost  op- 
tional source  than  the  Bureau  of  Engraving  and  Printing  for  postage  stamp  produc- 
tion; in  fact,  at  that  time,  the  Postal  Service  was  continuing  to  seek  lower  stamp 
costs  while  maintaining  quality.  However,  I  understand  that  in  the  downsizing,  the 
Postal  Service  lost  some  of  the  personnel  needed  to  oversee  and  monitor  these  pri- 
vate contracts.  Thus,  the  Service  may  have  been  forced  to  rely  more  heavily  upon 
the  Bureau  for  stamps.  For  example,  stamps  are  being  produced  by  four  private  sec- 
tor contractors  compared  to  the  eight  who  were  producing  postage  stamps  under  ac- 
tive contracts  as  of  June  1992.  Could  you  clarify  you  current  staffing  levels  in  this 
area  and  how  this  affects  your  ability  to  seek  lower  cost  stamps?  Is  this  a  possible 
cause  of  the  initial  shortage  of  G-stamps? 

Answer.  Staffing  levels  for  the  oversight  and  monitoring  of  private  sector  stamp 
contracts  are  adequate.  In  fact,  it  was  the  current  staff  that  prepared  the  specifica- 
tions and  requirements  which  resvdted  in  the  December  1993  award  of  the  "Multi- 
print"  contracts  to  four  private  sector  stamp  suppliers.  We  consider  the  "Multi-print" 
to  be  the  most  comprehensive,  cost-efficient  stamp  production  contract  ever  awarded 
by  the  USPS,  with  anticipated  negotiated  cost  savings  of  up  to  $50  million  over 
their  five-year  life.  Having  four  private  sector  stamp  printers  instead  of  the  previous 
eight  has  proven  to  be  more  manageable  and  cost  effective. 

Because  of  the  added  cost  savings  and  high  standards  of  quality,  the  Postal  Serv- 
ice has  been  turning  to  private  sector  printers  more  than  ever.  In  FY  1995,  the  pri- 
vate sector  is  schedviled  to  produce  approximately  40  percent  of  the  Postal  Service's 
stamp  requirements,  as  opposed  to  30  percent  in  previous  years.  This  percentage  is 
expected  to  increase  even  further  as  public  demand  for  self-adhesive  stamps  contin- 
ues to  climb,  as  the  Bureau  of  Engraving  and  Printing  (BEP)  currently  does  not 
produce  self-adhesive  stamps.  In  FY  1996,  for  example,  we  anticipate  that  the  pro- 
duction ratio  for  stamp  production  will  be  55  percent  of  total  volume  being  assigned 
to  the  BEP,  with  the  remainder  being  assigned  to  private  sector  sources. 

There  were  no  real  shortages  of  G  stamps.  Unfortunately,  unpredictable  customer 
demand  and  media  exploitation  played  a  major  role  in  the  problems  experienced 
during  the  recent  rate  change.  Sufficient  supplies  were  prepared  and  placed  in  stor- 
age well  in  advance  of  the  rate  implementation  date.  However,  the  initial  demand 
for  makeup  rate  stamps  far  exceeded  historical  customer  demand  for  these  items. 
Some  offices  experienced  demand  that  was  five  times  greater  than  the  last  rate 
change  in  1991,  with  the  majority  of  that  demand  occurring  on  January  3-4,  1995. 
Consequently,  some  offices  did  not  order  initial  supplies  sufficient  to  accommodate 
this  unprecedented  demand.  Normally,  rate  change  purchases  are  spread  out  over 
a  period  of  weeks  prior  to  and  after  tiie  date  the  rate  change  goes  into  effect.  With 
the  prior  sale  period  and  implementation  date  taking  place  during  the  holiday  sea- 
son, it  appears  that  many  customers  were  so  involved  with  holiday  preparations 
that  they  did  not  think  of  buying  postage  for  the  rate  change  until  it  was  time  to 
mail  their  bills  on  January  3,  1995. 

As  soon  as  post  offices  started  reporting  the  unprecedented  demand,  the  wheels 
were  set  in  motion  to  get  additional  stamps  deployed  where  needed.  Additional 
quantities  of  3-cent  makeup  stamps  were  rushed  to  areas  experiencing  shortages 
(with  some  offices  receiving  supplies  within  hours  and  most  offices  receiving  addi- 
tional supplies  on  January  4th  and  5th),  and  the  problem  was  generally  eliminated 
before  the  end  of  that  week. 

It  is  important  to  note  that  the  only  item  reported  to  be  in  short  supply  during 
the  first  few  days  of  the  rate  change  was  the  3-cent  makeup  stamp.  With  the  excep- 
tion of  this  one  item,  our  post  offices  reported  that,  from  a  stamp  availability  stand- 
point, this  was  the  smoothest  rate  implementation  ever  with  sufficient  backup  sup- 
plies readily  available. 

Question  30.  In  1994,  the  Postal  Service  awarded  a  "Multi-print"  contract  for  the 
production  of  offset,  gravure,  and  water  activated  offset-intaglio  stamps.  Although 
the  "Multi-print"  contract  was  awarded  last  year,  one  awardee  has  yet  to  produce 
offset-intaglio  stamps.  Why  has  this  awardee  not  produced  offset-intaglio  stamps  de- 
spite the  requirement  in  the  contract  to  do  so?  Why  did  the  Postal  Service  select 
this  contractor  when  it  could  not  perform  under  the  terms  of  the  contract  at  the 
time  of  selection? 

Answer.  The  December  31,  1993,  contracts  require  awardees  to  print  and  begin 
delivery  of  offset-intaglio  stamps  150  calendar  days  after  the  "activation  date  on  the 
delivery  order."  All  contractors  were  told  that  our  stamp  requirements  through  June 
1994  would  be  satisfied  by  placing  delivery  orders  under  the  old  stamp  production 
contracts.  This  means  that,  at  the  very  earliest  under  the  "Multi-print"  contracts, 
if  a  delivery  order  had  been  issued  for  a  particular  stamp  issue,  a  contractor  would 
not  be  required  to  deliver  stamps  until  the  second  half  of  1994. 


At  the  time  of  contract  award,  Ashton-Potter,  USA,  had  proposed  using  Northern 
Bank  Note  as  a  subcontractor;  therefore,  they  had  offset-intaglio  capability  imme- 
diately (not  with  a  combination  press,  but  with  separate  offset  and  intaglio  capabili- 
ties.) A  few  months  after  contract  award,  Ashton-Potter,  USA,  notified  the  USPS 
that  they  dropped  Northern  Bank  Note  as  a  subcontractor  as  the  two  were  unable 
to  reach  final  pricing  agreements,  nor  were  they  able  to  agree  to  a  timely  delivery 
date  for  a  new  offset-intaglio  printing  press.  As  a  result,  Ashton-Potter,  USA,  sub- 
mitted alternative  production  plans  to  the  Postal  Service  for  acceptance,  and  asked 
whether  they  should  pick  up  an  intagho  subcontractor  to  use  in  conjunction  with 
their  offset  printing  capabilities.  We  told  them  that  we  didn't  project  any  offset-in- 
taglio work  for  them  until  1995,  that  this  intaglio  capability  was  not  necessary  at 
that  time.  This  was  based  on  Stamp  Service's  allocations  which  had  been  prepared 
even  before  Northern  Bank  Note  backed  out  of  the  Ashton-Potter  contract  picture 
in  April  1994. 

Ashton-Potter,  USA,  has  been  allocated  offset-intagho  stamps  for  production  in 
1995.  Their  first  offset-intaglio  stamp  issue  is  scheduled  to  go  on  sale  in  June  1995. 

Question  31A.  By  consolidating  mail  processing  locations.  Area  Mail  Processing 
Centers  were  to  save  mail  processing  costs  and  maintain  the  same  or  better  delivery 
service.  As  GAO  pointed  out  in  a  May  1991  review  of  a  West  Virginia  Center,  the 
Centers  make  sense  conceptually.  However,  due  to  problems  in  South  Dakota  and 
Waterloo,  Iowa,  the  Area  Mail  Processing  Center  concept  was  suspended  and  no 
guidelines  exist  for  post-implementation  reviews  of  service  and  effectiveness.  The 
Postal  Service  planned  to  issue  revised  guidelines  at  the  end  of  1994  which  should 
have  contained  post-implementation  guideUnes.  A  review  of  the  Dakota  Central 
Center  was  due  for  completion  in  January  1995.  As  of  early  February,  the  program 
was  still  in  suspension,  and  the  guidelines  were  reportedly  delayed  until  March  due 
to  the  time  required  for  review  by  the  unions.  A  Postal  Service  office  in  California 
supposedly  gave  the  guideUnes  a  "live  run,"  but  it  is  not  clear  when  the  Dakota 
Central  review  will  be  complete.  When  will  the  guideUnes  be  issued?  When  will  the 
Dakota  Central  review  be  finished?  When,  if  at  aU,  will  the  Area  Mail  Processing 
Center  concept  be  continued? 

Answer.  The  revised  Area  Mail  Processing  GuideUnes  are  complete  and  have  been 
distributed  to  all  districts  and  processing  and  distribution  centers  responsible  for  de- 
veloping AMP  studies.  Attachment  V  is  a  copy  of  the  Guidelines.  The  Guidelines  in- 
clude a  post-implementation  review  and  are  focused  on  customer  satisfaction,  effi- 
ciency and  employee  impacts.  The  Dakota  Central  AMP  is  still  under  review. 

The  Area  Mail  Processing  Center  concept  was  never  interrupted,  only  the  proposal 
and  implementation  of  any  "new"  AMP  proposals  was  abated  pending  revision  of  the 
new  guidelines  and  AMP  process. 

Question  31B.  Did  Waterloo,  Iowa,  and  South  Dakota  Mail  consolidations  achieve 
their  operational  goals?  On  what  basis  did  you  make  this  determination?  What  cor- 
rective actions,  if  any,  were  necessary  for  improving  these  consolidations? 

Answer.  The  Waterloo,  Iowa,  AMP  achieved  its  operational  goals  and  Dakota 
Central  is  still  under  review. 

Effectiveness  of  the  Waterloo,  Iowa,  AMP  was  based  on  the  original  proposal  as 
will  be  Dakota  Central.  The  revised  AMP  GuideUnes  wUl  provide  for  specific  post 
implementation  evaluations  on  aU  future  AMP  proposals. 

Question  32.  In  September  1993,  the  Postai  Service  chose  a  contractor  to  help 
with  background  checks.  The  contract  caUed  for  a  1  year  deal  with  three  1  year  re- 
newal options.  What  is  the  status  of  this  contract?  Has  it  helped  the  service  improve 
background  checks? 

Answer.  The  contract  for  background  checks  was  renewed  for  another  year  in  No- 
vember 1994.  The  contract  has  improved  compUance  with  the  requirement  to  initi- 
ate background  check  requests.  We  have  experienced  some  problems  with  the  timeli- 
ness and  completeness  of  the  information  provided  by  the  contractor,  but  are  con- 
stantly working  to  improve  both.  We  are  using  the  one  year  contract  extension  to 
asses  whether  other  changes  in  our  employment  screening  process  would  improve 
the  overall  quality  of  hires. 

Question  33.  To  help  Congress  make  more  informed  judgments  about  Postal  Serv- 
ice oversight,  rate  requests,  and  performance,  GAO  recommended  in  1992  that  the 
Postal  Service  provide  a  note  to  the  financial  statements  which,  at  a  minimum,  de- 
scribe: 1)  the  post-retirement  benefits  plan;  2)  the  estimated  amounts  of  post-retire- 
ment health  care  benefits  earned  by  employees  and  retirees  since  July  1,  1971,  to 
the  date  of  the  statements  less  the  amounts  of  benefits  used;  3)  the  estimated 
amounts  of  benefits  attributable  to  the  period(s)  covered  by  the  statements;  and  4) 
the  assumptions  under  which  the  estimates  were  derived.  After  reviewing  your  re- 
cent financial  statements,  it  does  not  appear  that  the  Service  has  implemented  this 


recommendation.  Why  not?  When  does  the  Service  plan  to  implement  this  rec- 

Answer.  The  Postal  Service  does  not  plan  to  implement  this  recommendation.  A 
lengthy  review  of  the  Postal  Service  participation  in  the  Federal  Employees  Health 
Benefit  Plan  (FEHBP)  by  outside  actuarial  consultants  and  our  independent  exter- 
nal auditors  confirmed  that  the  Postal  Service  is  a  participant  in  a  multiemployer 
plan.  As  such,  the  Postal  Service's  pay-as-you-go  accounting  procedures  utilize  gen- 
erally accepted  accounting  principles  (GAAP),  according  to  FAS  106. 

The  Postal  Service  fully  addressed  the  issue  of  postretirement  health  care  costs 
in  Mr.  Coughlin's  July  6,  1992,  letter  to  Congressman  Conyers,  provided  as  Attach- 
ment VI.  The  Postal  Service's  financial  statements  for  the  year  ending  September 
30,  1994,  (and  prior  years)  fiiUy  discloses  the  law,  policy  and  obligations  of  the  Post- 
al Service  as  required  by  GAAP  with  regard  to  postretirement  health  benefit  pro- 
grams, retirement  programs,  and  various  OBRA  legislation. 

The  Postal  Service  does  not  routinely  prepare  the  information  that  would  be  re- 
quired to  implement  GAO's  recommendation.  The  supplementary  information  would 
have  to  be  calculated  through  actuarial  analysis.  Postal  ratepayers  would  ultimately 
have  to  pay  the  bill  for  an  independent  actuary  to  perform  such  a  calculation. 

Since  postal  employees  participate  in  the  FEHBP,  we  believe  that  providing  sepa- 
rate information  for  the  Postal  Service  is  redundant  to  what  should  be  available  for 
the  FEHBP  as  a  whole.  As  we  indicated  in  our  letter,  we  beUeve  that  the  cost  of 
implementing  this  recommendation  would  exceed  the  benefits  and  would  be  mis- 
leading by  implying  that  the  Postal  Service  has  more  control  over  health  benefit 
costs  than  it  actually  does 

Question  34A.  I  note  fi-om  the  Postal  Service  annual  financial  reports  submitted 
to  Congress  that  the  service's  long-term  debt  has  increased  from  about  $3  billion 
in  1986  to  almost  $7.7  billion  in  1994.  The  Act  of  1970  currently  limits  such  debt 
to  $15  billion.  The  service's  revenue  has  not  kept  pace  with  its  operating  costs,  and 
the  net  capital  deficiency  (the  cumulative  net  losses  after  all  expenses)  grew  from 
$2.7  billion  in  1992  to  about  $6  billion  in  1994.  At  the  same  time,  the  service  is 
increasingly  constrained  financially  by  requirements  to  fully  finance  its  employee 
costs  (including  retirement,  health  care,  etc.).  Fortunately,  the  growth  in  the  econ- 
omy, particularly  in  the  last  several  years,  and  the  related  mail  volume  growth  have 
allowed  the  service  to  control  somewhat  its  operating  deficit  and  hence  its  postage 
rate  increases.  What  accounts  for  this  growth  in  long-term  debt?  Are  you  concerned 
that  the  Service  is  increasingly  using  deficit  financing,  rather  than  a  pay-as-you-go 
approach  through  adequate  rate  changes,  to  finance  its  operations  and  capital  im- 

Answer.  The  increase  in  the  Postal  Service's  long-term  debt  since  1986  is  pri- 
marily due  to  the  massive  investment  it  has  been  making  in  automated  maU-proc- 
essing  technology,  along  with  the  necessary  modernization  of  an  aging  facility  infra- 
structure. From  1986  to  1994  the  Postal  Service's  land,  buildings  and  equipment  in- 
creased by  $9.1  billion.  These  investments  in  our  operations  will  ultimately  save  us 
billions  of  dollars.  All  of  the  borrowing  which  occurred  from  1986  to  1994  was  used 
to  finance  capital  additions  and  new  technologies. 

The  Postal  Service  is  not  relying  on  deficit  financing  to  fund  its  operations.  We 
are  committed  to  achieving  break-even  over  time.  However,  the  cost  burdens  on  the 
Postal  Service  have  increased  dramatically  in  recent  years,  largely  as  a  result  of 
OBRA  cost  transfers.  It  has  been  extremely  difficult  for  the  Postal  Service  to  absorb 
these  costs,  which  have  resulted  in  operating  deficits.  It  is  no  coincidence  that  since 
1987,  the  year  OBRA  payments  first  began,  the  Postal  Service  has  earned  a  net  in- 
come only  once.  Indirectly  then,  these  OBRA  costs  have  reduced  the  Postal  Service's 
financial  flexibility  and  forced  us  to  borrow  more  to  finance  our  capital  investments. 

Question  34B.  What  would  have  been  the  impact  on  postage  rates  today  if  the 
service  has  experienced  a  zero  mail  volume  growth  in  fiscal  years  1994  and  1995? 
Specifically,  what  would  be  the  price  to  mail  a  less  than  one  ounce  First-Ciass  letter 

Answer.  Our  estimates  indicate  that  an  additional  one-cent  increase  would  have 
been  necessary  for  the  basic  First-Class  letter  rate  along  with  similar  percentage  in- 
creases for  other  mail  classes.  This  means  that  a  33-cent  rate  is  the  likely  result. 
In  other  words,  instead  of  a  bebw-inflation  10.3  percent  rate  increase,  the  First- 
Class  rate  would  have  been  13.8  percent,  or  above  the  rate  of  inflation. 

Question  35.  On  page  3  of  your  statements  you  discuss  running  the  Postal  Service 
"like  a  business"  and  the  fact  that  you  were  able  to  hold  rates  steady  for  4  years 
which  is  certainly  an  achievement;  however,  some  would  argue  you  achieved  this 
by  debt  financing  in  that,  like  the  federal  government,  you  have  been  carrying  some 
serious  deficits  at  the  end  of  your  fiscal  years  that  will  have  to  be  made  up  by  postal 
customers  through  the  recovery  of  prior  year  losses  in  future  rate  cases.  Considering 


this  argument,  how  serious  do  you  believe  the  Postal  Service  should  take  the  man- 
date in  the  Postal  Reorganization  Act  to  break-even  in  its  finances?  How  best  could 
this  consistently  be  accomplished? 

Answer.  The  Postal  Service  is  required  by  law  to  break-even  over  time  and  takes 
that  requirement  very  seriously.  However,  break-even  cannot  be  precisely  met  every 
year  due  to  various  factors.  Some  of  these  factors  are  imposed  from  outside  and 
some  of  these  factors  are  the  result  of  pragmatic  business  decisions  with  a  long-term 

First,  it  is  helpful  to  understand  the  costs  imposed  upon  the  Postal  Service.  As 
the  subcommittee  is  aware,  two  of  the  major  postal  legislative  issues  over  the  past 
several  years  have  been  retiree-related  costs  and  revenue  forgone.  It  is  important 
to  note  that  in  drafting  these  laws,  a  primary  goal  of  the  previous  subcommittee  was 
to  mitigate  the  impact  of  the  rate  increases  on  mailers  by  using  the  prior  years'  loss 
mechanism.  The  designed  outcome  is  larger  annual  net  losses  and  a  larger  prior 
years'  loss  recovery  for  future  rate  payers. 

Some  of  the  operating  losses  were  due  to  decisions  focusing  on  the  long-term  via- 
bility of  the  Postal  Service.  Our  decision  to  refinance  our  debt  in  1993  cost  $537  mil- 
lion that  year  but  will  save  over  $2  billion  in  the  long-term.  Also,  our  restructuring 
that  year  cost  an  additional  $1.2  bilhon  but  is  estimated  to  save  $1.4  billion  this 
year  and  will  save  similar  amount  annually  for  years  to  come.  Restructuring  was 
a  good  business  decision,  and  many  Federal  and  agencies  are  now  undergoing  simi- 
lar efforts. 

Mail  volume  is  growing  and  at  least  part  of  that  can  be  attributed  to  a  relatively 
healthy  economy.  However,  that  was  not  the  case  when  Mr.  Runyon  was  appointed 
Postmaster  General  in  1992.  The  Postal  Service  had  recently  implemented  its  sec- 
ond consecutive  rate  increase  greater  than  inflation  over  the  previous  three  years 
and  mail  volume  growth  was  stagnant.  The  Postal  Service  has  substantial  fixed 
costs  and  is  subject  to  inflationary  pressures.  Thus,  it  reUes  upon  volume  and  the 
subsequent  revenue  growth  to  maintain  the  fixed  network  and  pay  for  pay  in- 
creases. Consequently,  it  was  decided  to  delay  the  implementation  of  the  next  rate 
increase  and  mitigate  its  impact.  Mail  volume  has  increased  6.4  percent  over  the 

East  two  years  afler  remaining  virtually  unchanged  for  the  two  previous  years, 
loreover,  early  indications  are  that  our  moderate  rate  increase  is  paying  dividends 
as  mail  volume  continues  to  grow. 

Question  36.  You  say  that  the  Postal  Service  will  have  contributed  $14  biUion  to 
reduce  the  federal  deficit  through  1998.  Aren't  these  payments  for  expenses  and 
costs  the  Postal  Service  should  have  shouldered  in  the  first  place?  Please  provide 
a  detailed  breakdown  of  this  $14  billion  figure. 

Answer.  The  Postal  Reorganization  Act  (PRA)  specifically  mandated  the  protection 
of  the  retirement  benefits  of  postal  employees  through  continued  participation  in  the 
CSRS  and  FEHBP.  Further,  it  was  clearly  intended  in  the  PRA  that  the  Postal 
Service  pay  for  retirement  and  health  benefits  at  the  same  level  as  all  other  Govern- 
ment agencies.  The  OBRAs  of  1985,  1987,  1989,  1990  and  1993  have  completely 
eradicated  this  concept  by  imposing  new  costs  on  the  Postal  Service  first  prospec- 
tively, then  retroactively.  The  Postal  Service  now  funds  considerably  more  of  its  re- 
tirement costs  than  other  agencies.  The  Postal  Service  has  no  objection  to  paying 
the  full  cost  of  benefits  related  to  postal  employment.  However,  the  retroactive  man- 
ner in  which  many  of  these  obligations  were  imposed  (including  the  imposition  of 
retroactive  interest  in  OBRA  1993)  has  seriously  damaged  the  financial  position  of 
the  Postal  Service,  which  ultimately  must  pass  these  costs  on  to  its  ratepayers. 

An  analysis  of  the  $14  billion  estimated  OBRA  costs  through  1998  follows: 

[dollars  in  billions] 

Fiscal  Year  °BRA         OBRA         OBRA         °^''*         OBRA         OBRA  ,„.,! 

^'"^'^*^'  1985  1987  1989        ^S"/'      90  Retro        1993  T"'*' 


1987  0.010  0.010 

1988  0.053   0.510  0.563 

1989  0.100   0.270  0.370 

1990  0.166  0.074  0.240 

1991  0.749   1.901  2.650 

1992  0.871   0.081  0.952 

1993  1.061   0.070   0.857  1.988 

1994  1.139   0.054   0.043  1.236 

1995  1.249   0.034   0.045  1.328 


[dollars  in 


Fiscal  Year 




90  Cur- 

90  Retro 




Total  .... 














Question  37.  It  was  reported  in  the  media  and  by  the  former  Chairman  of  the  old 
Committee  on  Post  Office  and  Civil  Service  that  somehow  you  were  "cooking  the 
books"  on  your  year-end  loss  of  $914  million  and  it  should  have  been  a  loss  of  $1.3 
billion  except  for  some  maneuvering  of  your  workers'  compensation  account.  Would 
you  set  the  record  straight  on  that  concern?  What  changes  to  your  accounting  prac- 
tices were  adopted  that  may  lead  individuals  to  believe  your  bottom  line  for  last 
year  was  not  accurate? 

Answer.  There  was  no  change  to  Postal  Service  "accounting  practices"  in  regard 
to  workers'  compensation  expense  adopted  in  FY  1994.  There  was  a  year-end  change 
to  the  accrual  for  workers'  compensation  liability — the  estimate  for  future  workers' 
compensation  pajonents  that  the  Postal  Service  carries  on  its  books  in  accordance 
with  Generally  Accepted  Accounting  Principles  (GAAP).  This  liability  is  estimated 
at  fiscal  year-end  by  the  Workers'  Compensation  Estimation  Model  based  on  strati- 
fied pajonent  data.  At  the  beginning  oi  fiscal  year  1994,  the  Postal  Service  antici- 
pated, and  subsequently  accrued  for,  another  large  increase  in  this  liability  based 
on  a  long-term  historic  trend  towards  constantly  escalating  workers'  compensation 
payments.  However,  when  we  received  the  year-end  tape  from  the  Department  of 
Labor  (DOL),  the  model  estimated  a  slight  decrease  in  the  year-end  workers'  com- 
pensation liabiUty.  This  reduction  is  attributed  to  a  number  of  cost  reduction  actions 
undertaken  in  FY  1993  and  FY  1994  by  both  postal  management  and  the  DOL  (pri- 
marily, the  postal  Workers'  Compensation  Task  Force  and  the  DOL's  Periodic  Roll 
Review  Task  Force).  The  adjustment  from  the  expense  that  the  Postal  Service  had 
accrued  to  the  actual  results  based  on  these  year-end  data  from  DOL  resulted  in 
a  large  adjustment  to  reduce  workers'  compensation  expense  and  liability.  This  was 
a  straight-forward  adjustment  that  was  reviewed  and  approved  by  the  Postal  Serv- 
ice's outside  auditors,  Ernst  &  Young  (E&Y),  as  being  in  accordance  with  GAAP.  In 
fact,  E&Y  and  their  actuaries  spent  a  significant  portion  of  their  time  during  the 
year-end  audit  validating  these  data  and  ensuring  that  the  numbers  were  reason- 
able and  the  methodology  used  was  actuarially  sound  and  consistent  with  prior 
years'  methodologies.  Simply  stated,  our  bottom  line  was  accurately  presented. 

Question  38.  In  the  U.S.  Postal  Service  Fiscal  Year  1996  Budget  Congressional 
Submission,  page  II-8  (Statement  of  Revenue  and  Expense),  "servicewide  expenses" 
for  fiscal  year  1995  are  estimated  to  decrease  about  25  percent  from  1994 — to  about 
$285  million.  However,  servicewide  expenses  are  estimated  to  increase  to  nearly 
1994  levels  in  fiscal  year  1996. 

Answer.  What  specific  expenses  are  included  in  "servicewide  expenses'7  What  ac- 
counts for  the  25  percent  decrease  in  these  costs  in  fiscal  year  1995?  Similarly,  what 
accounts  for  the  estimated  increase  in  these  costs  from  fiscal  year  1995  to  fiscal  year 

Answer.  The  Postal  Service's  fiscal  year  budget  submission  includes  the  following 
expense  categories:  domestic  and  international  mail  indemnities;  insurance  claims; 
uncollectable  receivables  and  other  write-offs;  embossed  stamped  envelopes;  adver- 
tising; unemployment  compensation;  reimbursements;  gain  or  loss  on  disposal  of 
capital  assets;  and  miscellaneous  other  operating  expenses. 

The  annual  changes  in  the  servicewide  expense  totals  are  explained  as  follows: 

[Dollars  in  millions] 

FY  1995  FY  1996 

Total  expense  level — prior  year 375  285 

Changes  in  current  year: 

Insurance  claims  and  indemnities  -30  4 

Unemployment  compensation  -  28  4 


[Dollars  in  millions] 

FY  1995      FY  1996 

Gain  or  loss  on  asset  dispositions 


Gain  or  loss  on  foreign  currency  fluctuations 

Misc.  supplies,  materials  and  services 

Total  expense  level — current  year 285         357 









Response  to  Written  Questions  Submitted  by  Hon.  Robert  L.  Ehrlich,  Jr.,  to 

Marvin  Runyon 

Question  1.  As  you  have  stated,  the  mail  service  is  very  complex  system.  There 
will  always  be  mechanical  and  human  error  in  your  operations.  Unfortunately,  our 
citizens  remember  the  one  letter  that  was  late,  instead  of  the  hundreds  that  are  on 
time.  The  last  report  showed  an  on-time-performance  rate  of  84  percent.  What  spe- 
cific actions  have  you  taken  to  reach  the  Postal  Service's  goal  of  a  95  Percent  on- 
time-performance  rate? 

Answer.  Many  efforts  are  underway  and  planned  for  the  future  that  focus  on  serv- 
ice improvement,  specifically  in  the  areas  of  collections,  processing  and  distribution, 
delivery,  and  transportation  and  logistics. 

External  First-Class  Measurement  System  (EXFC)  diagnostic  information  identi- 
fied service  problems  as  a  result  of  no  pick-ups,  or  premature  pick-ups  of  mail  from 
collection  boxes.  The  Collection  Management  System  (CMS),  a  program  aimed  at  en- 
suring timely  pick-up  of  collection  mail  is  in  the  process  of  being  implemented. 
Memory  buttons  are  installed  in  collection  boxes  at  critical  collection  points  and 
through  use  of  wand  scanners  data  is  collected  from  these  collection  points.  The 
data  is  then  analyzed  to  ensure  all  collection  points  were  collected  in  the  correct  se- 
quence and  times. 

In  our  processing  and  distribution  function  we  have  placed  renewed  emphasis  on 
automation  to  maximize  up-the-ladder  distribution  and  to  enhance  the  quality  of  the 
distribution  process.  Software  enhancement  to  increase  the  amount  of  barcodes  ap- 
plied internally  and  to  improve  the  depth  of  sort  are  being  explored.  Similarly,  spe- 
cial attention  is  being  provided  to  gain  high  quality  addressing  from  our  customers. 
Through  partnership  efforts  with  the  private  sector  we  are  exploring  technologies 
to  improve  deficient  addresses  in  mailers'  files,  especially  for  those  addressed  in 
high-rise  buildings. 

In  delivery  operations  we  are  continuing  to  implement  delivery  point  sequencing 
(DPS).  DPS  allows,  through  the  use  of  automation,  the  sequencing  of  an  individual 
carriers  route  to  delivery  point  sequence  thereby  reducing  the  amount  of  mail  a  car- 
rier must  case  manually. 

In  the  area  of  logistics  and  transportation,  we  are  currently  pilot  testing  Elec- 
tronic Data  Interchange  (EDI)  with  air  transport  providers.  EDI  will  provide  real- 
time information  on  the  status  of  air  transportation  and  the  ability  to  react  to  meet 
service  commitments.  Through  the  use  of  EDI  we  can  minimize  the  possibility  of 
assigning  mail  to  flights  with  insufficient  lift.  In  addition,  mail  overflow  at  con- 
gested transfer  hubs  will  be  reduced  thereby  increasing  air  carrier  ability  to  meet 
our  service  commitments. 

To  assist  in  monitoring  the  effectiveness  of  our  system  as  a  whole,  mail  conditions 
at  bulk  mail  centers,  processing  and  distribution  centers  and  delivery  units  are 
monitored  on  a  daily  basis.  Monitoring  mail  conditions  enables  us  to  identify  oppor- 
tunities to  improve  service  by  placing  emphasis  in  problem  areas.  We  have  estab- 
lished a  National  Operations  Management  System  (NOMS)  that  monitors  field  oper- 
ating conditions.  This  allows  us  to  identify  significant  trends,  project  workload  vol- 
ume shifts  and  maintain  past  performance  in  order  to  help  the  field  prepare  to  meet 
volume  shifts  and  maintain  service  levels.  We  are  currently  exploring  expanding  the 
NOMS  capability  to  our  ten  area  offices. 

Because  of  their  size,  major  metropolitan  areas  have  a  significant  impact  on  our 
national  service  performance.  We  have  identified  specific  metropolitan  areas  where 
service  has  been  below  expectations  and  focused  improvement  efforts  there.  For  ex- 
ample, teams  of  specialists  from  Headquarters  have  been  available  to  support  and 
will  continue  to  support  service  improvement  in  these  areas.  These  improvement 


teams  provide  on-site  identification  of  the  sources  and  causes  of  incorrectly  distrib- 
uted mail  and  develop  action  items  for  initiating  corrective  action. 

Question  2.  You  testified  that  you  want  to  "free  your  employees  from  burdensome 
rules  and  bureaucratic  red  tape."  Please  give  specific  rules  and  red  tape  that  can 
be  reformed  or  eliminated? 

Answer.  There  are  rules  regarding  assignment  of  work  which  restrict  both  em- 
ployees and  managers  from  providing  the  best  possible  service.  A  distribution  clerk 
can't  pitch  in  and  help  deliver  mail;  certain  specific  and  limited  criteria  must  be  met 
before  employees  can  work  outside  their  job  classifications.  Likewise,  a  mail  handler 
can't  just  sit  down  at  a  distribution  case  and  sort  letter  mail,  even  if  that's  the  job 
which  needs  the  most  attention  right  then.  And  supervisors  in  major  facilities  are 
even  more  restricted  from  touching  mail  at  all.  These  "jurisdictional"  issues  have 
become  sore  spots  between  all  major  unions,  with  ever-increasing  amounts  of  time 
spent  attempting  to  resolve  the  problems — on  the  workroom  floor  and  in  the  griev- 
ance-arbitration process.  Our  inability  to  move  employees  interchangeably  from  task 
to  task  is  inefficient  and  costly  and  our  customers  suffer  the  consequences. 

Question  3.  Now  that  rates  have  increased,  how  do  you  plan  to  compensate  for 
a  negative  equity  of  six  (6)  billion  dollars? 

Answer.  The  Postal  Service  had  a  positive  equity  position  as  recently  as  1987. 
Since  that  time,  a  number  of  OBRAs  have  imposed  additional,  unanticipated  costs 
on  the  Postal  Service.  These  OBRA  costs  totaled  $8  billion  through  1994  and  are 
expected  to  increase  to  almost  $14  billion  by  1998.  The  $6.3  billion  in  net  losses 
which  have  occurred  since  1986  can  largely  be  attributed  to  the  Postal  Service's  in- 
ability to  absorb  these  huge,  unexpected  increases  in  its  costs.  In  addition,  manage- 
ment has  made  investments  in  the  Postal  Service's  future,  such  as  the  restructuring 
and  debt  refinancing,  which  have  had  considerable  short-term  costs,  but  which  will 
reap  long-term  dividends.  We  believe  that  the  restructuring  is  beginning  to  pay  off 
as  indicated  in  our  recent  financial  and  service  results. 

We  are  very  concerned  about  the  negative  equity  position.  We  are  working  with 
the  Board  of  Governors  to  develop  an  action  plan  to  restore  equity.  The  10.3  percent 
postage  rate  increase  implemented  in  January  represented  a  positive  start  in  this 
direction.  By  keeping  the  average  rate  increase  below  inflation,  we  were  able  to  in- 
crease revenues  without  adversely  affecting  mail  volume.  Maintaining  our  revenue 
base  is  key  to  the  Postal  Service's  future,  because  ultimately,  the  only  way  to  im- 
prove the  Postal  Service's  equity  position  is  by  generating  annual  net  incomes  con- 
sistently. We  believe  that  we  can  significantly  improve  the  Postal  Service's  financial 
standing  as  long  as  we  are  not  mandated  to  absorb  additional  costs.  It  will  take 
time,  though,  to  restore  our  equity  position.  The  postal  ratemaking  process  generally 
allows  nine  years  to  recover  prior  years'  losses. 

Response  to  Written  Questions  Submitted  by  Hon.  Barbara-Rose  Collins  to 

Marvin  Runyon 

Question  1.  There  has  been  a  tremendous  increase  in  the  proportion  of  postal 
service  mail  processing  activities  associated  with  nonproductive  time  over  the  last 
decade  and  more.  Can  you  explain  why  this  time  has  increased  to  where  it  is  now 
22  percent  of  the  total  processing  time? 

Answer.  First  of  all,  "nonproductive"  is  a  misnomer  that  has  been  incorrectly  ap- 
plied to  the  very  necessary  time  required  for  employee  breaks,  clocking  in  and  out, 
and  moving  empty  equipment.  We  no  longer  use  the  term  and  we  provided  testi- 
mony in  previous  rate  cases  explaining  why  it  is  inappropriate.  The  correct  termi- 
nology is  overhead.  We  do  not  agree  that  there  has  been  a  tremendous  increase  in 
the  proportion  of  postal  service  mail  processing  activities  associated  with  overhead. 
For  example,  if  we  look  at  mail  processing  overhead  costs  as  a  percentage  of  direct 
costs  from  fiscal  years  1986  through  1992,  overhead  averaged  23  percent  of  direct 
costs.  In  fiscal  year  1992  mail  processing  overhead  costs  were  23  percent  of  direct 
costs  the  same  as  the  average  for  the  seven  year  period.  Although  there  may  be  an 
upward  trend  in  overhead  over  certain  periods  of  time,  some  of  this  trend  may  sim- 
ply be  due  to  changes  in  data  collection. 

Question  2.  What  was  the  change  in  total  factor  productivity  for  the  Postal  Service 
for  each  quarter  in  FY  94  and  the  first  quarter  of  FY  95?  What  was  the  change  in 
productivity  for  all  of  FY  94? 



Total  Factor  Productivity 

Period  TFP 

FY  1994: 

Ql  -0.2 

Q2  -1.7 

03  -1.1 

Q4  0.4 

Annual -0.4* 

FY  1995: 

Ql 0.4 

'The  four  quarterly  numbers  do  not  sum  to  the  annual  change  because  resource  usage  is  different  in  each  quarter.  For  example,  Quarter 
IV  has  112  days  versus  84  in  the  other  quarters.  Moreover,  mail  volumes  are  seasonal,  therefore,  more  resources  are  utilized  in  Quarter  I 
than  in  the  other  quarters. 

Question  3.  In  the  last  Congress,  the  postal  service  testified  that  it  was  no  longer 
using  paid  confidential  informants  in  internal  narcotics  investigations.  Is  the  mora- 
torium still  in  effect?  Are  there  any  plans  to  lift  it? 

Answer.  The  moratorium  on  the  use  of  paid  confidential  informants  from  outside 
the  Postal  Service  to  investigate  internal  narcotics  cases  is  still  in  effect.  The  efforts 
we  undertook  to  revamp  this  program  have  been  completed.  We  have  identified  a 
number  of  facilities  where  managers  and  employees  have  expressed  concern  over  the 
prevalence  of  drugs  in  the  workplace.  Results  of  the  Postal  Service  Employee  Opin- 
ion Survey  show  that  there  are  concerns  among  employees  regarding  drugs  in  our 
Processing  and  Distribution  Plants.  We  are  formulating  a  strategy  to  address  this 

Question  4.  Provide  a  detailed  status  and  update  on  the  postal  employees  fired 
last  year  as  a  resvilt  of  the  postal  inspectors'  drug  sting.  Include  the  number  fired, 
current  (or  not)  employment  status,  location  of  employment  and  title  and  position. 
What  is  the  current  status  of  the  postal  inspectors  involved  in  the  sting? 

Answer.  On  March  10,  1995,  the  Merit  Systems  Protection  Board  declined  to  re- 
view the  administrative  judge's  October  1994  decision  affirming  the  removals  of 
former  Postal  Inspectors  Tim  Marshall  and  Daniel  Kuack.  Both  men  had  been  re- 
moved in  1993.  Attachment  VII  details  the  current  status  of  Postal  Service  employ- 
ees involved  in  the  Cleveland  drug  sting. 

Question  5.  In  the  last  EOS,  employees  expressed  concern  over  drug  and  sub- 
stance abuse  by  their  coworkers.  Specifically,  how  are  you  addressing  their  con- 

Answer.  The  Postal  Service  has  a  wide  range  of  responses  to  the  substance  abuse 
problems  identified  by  our  employees  in  the  Employee  Opinion  Survey  (EOS).  First, 
we  conduct  pre-employment  drug  screening  for  applications  for  all  of  our  positions, 
both  career  and  non-career.  Second,  we  have  a  comprehensive  Employee  Assistance 
Program.  This  program  is  covered  in  new  employee  orientation  and  provides  a  con- 
tinuing program  of  employee  education  on  substance  abuse  issues  as  well  as  sub- 
stance aouse  counseling  and  referral  to  those  in  need  of  such  services.  Third,  the 
Inspection  Service  is  very  active  in  identifying  and  documenting  illegal  substance- 
related  activity  in  the  workplace. 

While  we  believe  we  have  a  comprehensive  response  to  this  problem,  we  have  en- 
couraged our  managers  to  conduct  focus  groups  with  employees  to  further  under- 
stand this  and  other  EOS  results  so  that  we  can  adjust  our  strategies  to  meet  em- 
ployee needs. 

Question  6.  I  understand  that  the  Diversity  Department  covers  more  than  affirm- 
ative action.  What  other  areas  are  covered  by  this  department? 

Answer.  Diversity  Development  has  primary  responsibility  for  monitoring  affirma- 
tive action  compliance  by  developing  agency  plans  that  are  submitted  to  the  Equal 
Employment  Opportunity  Commission  and  the  Office  of  Personnel  Management.  It 
promotes  diversity  awareness  within  the  organization;  interfaces  with  the  Quality 
department;  helps  field  management  with  diversity  issues;  and  helps  recruit  diverse 
individuals  for  postal  employment.  The  best  way  to  highlight  other  areas  covered 
by  Diversity  Development  is  to  describe  the  five  major  mnctions  within  the  depart- 

1.  Policies  and  Planning  helps  other  functions  ensure  that  diversity  is  considered 
in  postal  policy  and  serves  as  external  liaison  with  other  government  agencies  and 
private  industry.  This  unit  is  also  responsible  for  developing  and  implementing  na- 
tional policy  of  specific  diversity  related  issues  (e.g.,  sexual  harassment)  that  affect 
all  postal  employees. 


2.  Customer  Interface  helps  identify  business  needs  to  serve  diverse  domestic  and 
international  customers  through  retail  and  lobby  programs,  and  through  the  devel- 
opment of  programs  and  revision  of  signs,  brochures,  and  handbooks.  It  serves  as 
a  liaison  with  operations,  marketing,  and  sales  to  identify  diverse  markets,  and  it 
supports  unique  customer  needs  through  community  outreach  programs. 

3.  SuppUer  Diversity  is  an  essential  part  of  the  Postal  Service's  long-term  cor- 
porate strategy  to  remain  competitive  and  profitable  in  a  dynamic  marketplace.  The 
Postal  Service  recognizes  that  a  diverse  supplier  base  is  one  of  the  most  effective 
resources  any  business  can  have.  This  unit  also  partners  with  Purchasing  and  Mate- 
rials to  manage  program  activities  in  Supplier  Diversity.  Through  this  unit.  Diver- 
sity Development  is  charged  with  developing  and  monitoring  the  overall  program 
and  performs  in  an  independent  advocacy  and  reporting  role  in  compliance  with  the 
intent  of  Public  Law  95-507. 

4.  Strategic  Programs  and  Education  and  Research  oversees  the  coordination  be- 
tween Headquarters  and  the  field  on  strategic  programs  and  initiatives  related  to 
Diversity  Development.  It  is  responsible  for  recommending  programs  to  ensure  that 
field-based  corporate  initiatives  related  to  Diversity  Development  are  achieved.  This 
unit  oversees  the  development,  modification,  and  implementation  of  these  programs. 
This  unit  also  develops  diversity  education  and  orientation  models,  programs,  and 
processes,  and  conducts  research,  evaluation,  and  profile  trend  analysis  of  the 
workforce  as  it  relates  to  diversity  issues.  The  units  also  assist  in  analyzing  the  Em- 
ployee Opinion  Survey. 

5.  Diversity  Development  has  a  consulting  role  to  identify,  design  and  develop 
tools  and  techniques  that  instill  in  the  consciousness  of  every  employee  and  cus- 
tomer that  we  treat  everyone  with  dignity.  That  role  includes  raising  the  awareness 
of  individual  and  group  attitudes  about  various  cultures  that  may  inhibit  the  way 
we  treat  one  another  and  do  business.  Diversity  has  the  responsibility  to  keep  the 
issues  of  diversity  in  the  forefront  so  that  over  time,  managers  and  craft  employees 
understand  the  importance  of  diversity  issues  to  postal  success. 

Question  7.  We  see  postal  advertising  all  over  town  and  in  newspapers  telling  us 
what  a  great  job  the  service  is  doing.  How  much  money  is  the  Postal  Service  spend- 
ing on  advertising?  How  does  this  help  the  Postal  Service  perform  its  responsibility 
for  delivering  the  mail  in  a  timely  manner  to  our  constituents? 

Answer.  The  amount  the  Postal  Service  spends  on  advertising  varies  from  year 
to  year,  based  on  market  conditions  and  other  needs.  The  budget  for  fiscal  year  1995 
is  $73  million.  The  advertising  that  flows  from  this  spending  contributes  to  our  mis- 
sion in  two  respects — 1)  it  enables  us  to  get  information  into  the  hands  of  our  cus- 
tomers so  they  can  use  our  products  and  services  to  best  serve  their  needs  and  2) 
advertising  builds  awareness  and  generates  additional  revenue  which  contributes  to 
our  ability  to  keep  down  the  cost  of  postage  for  all  postal  customers. 

Question  8.  You  have  initiated  a  "performance  cluster"  concept  at  the  operating 
level  to  get  managers  in  different  functions  to  voluntarily  coordinate  their  efforts 
and  work  together  effectively.  How  well  is  the  cluster  concept  working?  Do  you  plan 
to  reestablish  local  manager  positions  to  oversee  both  customer  service  and  mail 
processing  operations  in  other  metropolitan  areas? 

Answer.  The  cluster  concept  is  generally  working  well,  as  evidenced  by  the  signifi- 
cant improvements  in  service  and  financial  indicators.  We  will  continue  the  open 
dialogue  with  Field  Management  about  the  need  to  expand  the  Metro  Manager  con- 
cept used  in  Washington,  D.C.,  (or  other  alternatives)  to  other  Districts  or  large 
complex  Metropolitan  locations. 

Question  9.  In  1989,  the  Postal  Service  lowered  service  standards  for  a  significant 
portion  of  first-class  mail.  Do  you  have  any  plans  for  further  revise  service  stand- 

Answer.  We  have  no  plans  to  systematically  review  and  revise  the  current  First- 
Class  Mail  service  commitments. 

Question  10.  Major  parts  of  the  Joint  Task  Force  addressed  flexibility.  How  many 
of  the  recommendations  made  in  the  report  have  been  implemented?  If  so,  which 
ones?  If  not,  why  not?  What  efforts  are  currently  underway  to  address  those  rec- 
ommendations? Please  provide  for  the  record. 

Answer.  The  Postal  Service  has  petitioned  the  Commission  to  initiate  a  rule- 
making to  consider  draft  rules  presented  by  the  Postal  Service  to  implement  a  broad 
array  of  Joint  Task  Force  recommendations.  A  copy  of  the  petition  is  provided  as 
Attachment  IV. 

Question  11.  How  many  postal  employees  who  took  buyouts  were  later  employed 
as  consultants  or  as  principals  of  small  corporations  which  received  contracts  from 

Answer.  Attachment  III  is  a  list  of  former  employees  who  have  as  of  March  1995, 
contracted  directly  with  the  Postal  Service  since  the  buyouts  began  in  August  1992. 


This  list  does  not  reflect  principals  of  small  corporations  which  have  received  con- 
tracts from  us;  nor  does  it  reflect  former  postal  employees  who  may  now  be  em- 
ployed by  a  Postal  Service  contractor.  This  is  because  our  contractual  data  base 
tracks  the  contractor  with  whom  we  contract,  not  the  employees  working  for  the 
contractor  (whether  they  are  former  postal  employees  or  not).  To  determine  the 
principals  of  small  corporations  which  have  contracts  would  require  research  into 
the  articles  of  incorporation  of  each  of  the  corporate  contractors.  This  sort  of  data 
IS  also  not  captured  or  tracked  by  our  contractual  data  base. 

Question  12.  I  understand  that  several  former  City  Bank  employees  have  been 
hired  as  consultants  to  the  Postal  Service.  How  many  such  consultants  have  been 

Answer.  There  have  not  been  any  former  Citibank  employees  hired  as  consultants 
to  the  Postal  Service.  Five  individuals/firms  with  whom  Mr.  Smith  has  had  profes- 
sional relationships  in  the  past  are  presently  under  consulting  contract  with  the 
Postal  Service  for  varying  business  needs. 

Question  13.  I  understand  you  have  a  contract  with  the  Gallup  organization  to 
collect  data  on  commercial  mailers'  opinions  of  postal  service  performance.  Please 
supply  a  copy  of  the  contract  for  the  record.  How  much  money  have  you  spent  on 
this  contract  so  far?  What  are  the  results  of  the  Gallup  survey  or  surveys'^  Please 

Answer.  The  Business  Customer  Satisfaction  Index  (BCSI)  is  an  ongoing  process 
of  measuring  the  satisfaction  level  of  our  business  customers.  The  BCSI  system  has 
gathered  data  since  Quarter  IV,  FY  1994.  At  this  point,  three  quarters  of  data  are 
available  (Quarter  IV,  FY  1994;  Quarter  I,  FY  1995;  Quarter  II,  FY  1995).  The  BCSI 
looks  at  customers  in  a  very  specific  way.  The  marketplace  is  segmented  into  na- 
tional accounts  (very  large  mailers);  premier  accounts  (mailers  spending  over 
$250,000  or  more  in  postage  but  not  national  accounts);  business  accounts  (mailers 
spending  less  than  $250,000  in  postage);  and  small  businesses  (mailers  spending 
less  than  $100,000  on  postage).  Therefore,  there  is  not  an  overall  rating  for  business 
customers,  nor  are  the  results  of  the  individual  categories  rolled  up  into  a  national 
rating.  A  review  of  our  performance  BCSI  indicators  is  currently  being  conducted 
by  an  action  planning  team  focused  on  the  Baldrige  criteria— 7.4  Customer  Satisfac- 
tion Determination.  Upon  completion  of  this  review,  a  determination  will  be  made 
regarding  the  release  of  BCSI  survey  data. 

The  Postal  Service  signed  a  four  year  fixed  price  contract  with  the  Gallup  Organi- 
zation on  April  8,  1993  for  $8.3  million  to  develop  and  implement  the  BCSI  process. 
Since  the  contract  signing,  several  modifications  have  been  made  including  addi- 
tional sampling  of  large  business  accounts  and  an  improved  process  for  identifying 
the  appropriate  customer  contacts  to  be  surveyed.  These  improvements  increased 
the  net  fixed  price  of  the  BCSI  contract  to  $11.9  million,  which  will  be  expended 
over  the  life  of  the  contract.  The  Postal  Service  has  expended  $4.2  million  to  date, 
for  research  and  development,  pilot  testing,  and  quarterly  data  collection.  A  copy  of 
the  BCSI  contract  is  provided  as  Attachment  I. 

Question  14.  Why  are  the  external  first-class  measurement  system  and  the  exter- 
nal Consumer  Service  Index  being  transferred  out  of  the  Consumer  Advocate's  of- 

Answer.  Management  of  the  External  First-Class  Measurement  System  (EXFC) 
and  the  external  Customer  Satisfaction  Index  (CSI)  are  not  being  transferred  out 
of  the  Consumer  Advocate's  office. 

Question  15.  You  have  testified  that  the  Postal  Service  has  a  negative  equity  of 
about  $6  billion.  Why  has  the  negative  equity  situation  occurred?  Should  it  be  a 
cause  for  concern  and  what  can  or  should  be  done  about  it? 

Answer.  The  Postal  Service  had  a  positive  equity  position  as  recently  as  1987. 
Since  that  time,  a  number  of  OBRAs  have  imposed  additional,  unanticipated  costs 
on  the  Postal  Service.  These  OBRA  costs  totaled  $8  billion  through  1994  and  are 
expected  to  increase  to  almost  $14  billion  by  1998.  The  $6.3  billion  in  net  losses 
which  have  occurred  since  1986  can  largely  be  attributed  to  the  Postal  Service's  in- 
ability to  absorb  these  huge,  unexpected  increases  in  its  costs.  In  addition,  manage- 
ment has  made  investments  in  the  Postal  Service's  future,  such  as  the  restructuring 
and  debt  refinancing,  which  have  had  considerable  short-term  costs,  but  which  will 
reap  long-term  dividends.  We  believe  that  the  restructuring  is  beginning  to  pay  off 
as  indicated  in  our  recent  financial  and  service  results. 

We  are  very  concerned  about  the  negative  equity  position.  We  are  working  with 
the  Board  of  Governors  to  develop  an  action  plan  to  restore  equity.  The  10.3  percent 
postage  rate  increase  implemented  in  January  represented  a  positive  start  in  this 
direction.  By  keeping  the  average  rate  increase  below  inflation,  we  were  able  to  in- 
crease revenues  without  adversely  affecting  mail  volume.  Maintaining  our  revenue 
base  is  key  to  the  Postal  Service's  future,  because  ultimately,  the  only  way  to  im- 


prove  the  Postal  Service's  equity  position  is  by  generating  annual  net  incomes  con- 
sistently. We  believe  that  we  can  significantly  improve  the  Postal  Service's  financial 
standing  as  long  as  we  are  not  mandated  to  absorb  additional  costs. 

Question  16.  Does  the  Postal  Service  have  any  plans  for  an  expanded  role  in  the 
international  mail  area?  If  so,  what  are  those  plans? 

Answer.  The  Postal  Service,  like  other  postal  administrations  around  the  world 
provides  international  mail  services  in  an  environment  increasingly  influenced  by 
commercial  and  technical  developments,  and  by  mailer  demands  for  more  and  better 
services.  Although  the  Postal  Service  has  faced  growing  competition  since  the 
1970's,  it  opened  the  door  to  competitive  developments  even  further  in  1986  when 
it  suspended  the  application  of  the  Private  Express  Statues  to  outbound  inter- 
national letters.  In  onier  to  better  serve  mailer  interests  and  to  assure  an  adequate 
base  of  revenues  for  the  services  it  provides  in  such  an  environment,  the  Postal 
Service  is  seeking  to  improve  the  quality  of  its  standard,  treaty  based  services  and 
to  offer  innovative  new  services  as  well.  It  has  recently  announced  the  start  of  two 
new  services.  International  Package  Consignment  Services  for  mail  order  companies 
sending  merchandise  packages  to  other  countries,  and  a  WORLDPOST  Priority  Let- 
ter service  for  correspondence  and  documents.  The  Postal  Service  is  also  considering 
a  realignment  and  strengthening  of  its  international  mail  functions  to  better  sup- 
port all  of  its  international  services  and  to  keep  up  with  similar  innovations  and 
developments  in  other  postal  administrations. 

Question  17.  Board  of  Governor  member,  Susan  Alvarado,  testified  before  the  Sub- 
committee on  March  18,  1995,  that  there  is  a  Chicago  Task  Force  Plan  which  ad- 
dresses the  Chicago  service  improvement  effort.  Please  provide  for  the  record.  Also, 
please  provide  for  the  record  detailed  steps  the  postal  service  has  taken  and  plans 
to  take  to  support  the  Chicago  service  improvement  effort. 

Answer.  Immediately  upon  arrival  of  the  Chicago  Task  Force  it  was  identified 
that  a  formal  operational  review  plan  needed  to  be  developed  that  identified  both 
areas  of  concern  that  needed  attention  and  included  a  roaa  map  for  recovery.  The 
plan,  known  as  the  "Chicago  Service  Improvement  Task  Force  Strategic  Plan",  is 
provided  as  Attachment  VIII.  The  Chicago  Service  Improvement  Task  Force  con- 
sisted of  experts  from  delivery  operations,  clerical  distribution  operations  and  retail 
operations.  The  team  members,  on  a  daily  basis,  reviewed  operations,  identified  defi- 
ciencies and  provided  detailed  written  instructions  to  local  management  to  ensure 
proper  procedures  were  put  into  place  to  correct  all  inefficient  procedures  which 
would  result  in  improved  service  to  the  customer.  In  addition  to  conducting  daily 
operational  reviews,  extensive  "Back  to  Basics"  training  was  given  to  all  delivery  su- 
pervisors and  managers  where  the  Task  Force  was  conducting  reviews.  Additionally, 
updated  training  was  also  given  to  window  clerks  to  ensure  that  they  provided  prop- 
er and  consistent  service  to  the  customers.  In  conjunction  with  the  daily  operational 
reviews,  the  Task  Force  also  redesigned  workroom  floor  layouts  to  increase  effi- 
ciency, conducted  an  extensive  route  management  (street)  review,  increased  automa- 
tion utilization  and  created  an  operations  model  that  aggressively  reviews  lost  time 
management,  time  avoidance  and  segmentation  as  a  means  of  improving  service. 
Prior  to  the  departure  of  the  Chicago  Service  Improvement  Task  Force,  Area  Vice 
President  William  Good  agreed  to  develop  a  Great  Lakes  Area  Task  Force  consisting 
of  fourteen  members  from  the  local  area  that  continued  reviews  and  assisted  the 
local  Chicago  management  team.  The  Area  team  would  also  be  available  for  inter- 
vention in  other  Great  Lakes  Area  District  offices. 

Question  18.  What  has  the  postal  service  learned  from  the  Chicago  service  im- 
provement effort,  which  started  much  earlier  than  the  local  Washington,  D.C.,  area 
efTort  and  included  an  intensive  examination  by  a  27  member  task  force,  that  has 
been  or  can  be  applied  to  solving  the  problems  in  the  DC  area?  What  outside  assist- 
ance has  the  service  used  and  is  using  now  to  help  management  and  employees  in 
local  facilities  to  become  more  committed  in  improving  teamwork  and  customer  serv- 

Answer.  One  of  the  more  successful  aspects  of  the  Chicago  Service  Improvement 
efTort  was  the  results  generated  from  the  use  of  the  Strategic  Plan  developed  by  the 
Task  Force.  All  management  members  found  it  to  be  a  valuable  tool  to  assist  them 
in  correcting  their  operations.  Further,  there  was  a  clear  shortfall  in  ongoing  man- 
agement training  that  needed  to  be  addressed.  All  training  that  was  conducted 
while  in  Chicago  was  well  received  and  found  to  be  valuable  by  local  management. 
Ongoing  training  efforts  by  local  Area  and  District  management  needs  to  become  a 
continuous  part  of  our  ongoing  efTort  to  increase  operational  efficiency  and  knowl- 
edge resulting  in  increased  customer  satisfaction.  A  monitoring  system  was  devel- 
oped to  review  operations  and  ensure  that  identified  problems  do  not  become  a  serv- 
ice issue.  During  the  formation  of  the  Chicago  Service  Improvement  Task  Force, 
there  were  no  outside  resources  utilized  to  help  increase  teamwork  and  customer 


service.  All  interface  with  craft  and  management  organizations  was  initially  done 
by  task  force  members.  Approximately  sixty  days  after  the  start  of  the  Task  Force, 
a  retired  USPS  Division  Manager  was  retained  to  help  the  Task  Force  interface 
with  local  political  representatives  and  customers  when  the  need  arose. 

Question  19.  Last  year,  a  District  postal  employee  was  arrested  after  it  was  dis- 
covered that  he  had  undelivered  first  class  soiled  and  contaminated  mail  stashed 
in  his  apartment.  What  happened  to  the  mail?  How  many  pieces  of  mail  were 
found?  Was  any  of  the  mail  delivered? 

Answer.  The  Washington,  D.C.,  Post  Office  has  officially  closed  its  investigation 
of  the  mail  found  in  the  apartment  of  a  former  letter  carrier.  Approximately  22,800 
pieces  of  mail  were  recovered  from  Mr.  Bogg's  apartment  in  October  of  1994.  Less 
than  one  percent  of  mail  was  deliverable  or  salvageable.  Most  of  the  mail  was  dated 
from  November  1991  to  October  1994  and  included  First-Class  Mail  and  bulk  busi- 
ness mail.  All  claims  for  loss  and  rifling  have  been  submitted  and  processed.  Despite 
this  unfortunate  incident,  service  is  improving  in  the  Washington,  D.C.,  Post  Office 
and  throughout  the  Capital  District. 

Question  20.  Would  you  please  provide  for  the  record  a  chart  showing  for  each 
year  since  1990,  the  number  of  full-time,  part-time  and  transitional  employees  work- 
ing for  the  Postal  Service  at  the  beginning  of  each  fiscal  year.  Please  include  a  brief 
explanation  of  how  or  when  a  transitional  employee  becomes  a  full-time  employee? 
Are  transitional  employees  aware  of  the  procedure  to  follow  in  becoming  a  full-time 
employee?  If  yes,  at  what  point  are  they  made  aware  and  provide  a  copy  of  any  per- 
sonnel document  or  notice  provided  the  transitional  employee.  Where  are  the  largest 
number  of  transitional  employees  concentrated?  Please  rank  according  to  number 
and  location. 

Answer.  It  is  not  possible  from  national  statistics  to  determine  whether  individual 
employees  were  hired  due  to  mail  volume  and  population  growth,  or  as  replacement 

Attachment  II  is  a  report  which  shows  the  NALC  and  APWU  employment  figures 
for  full-time,  part-time  and  transitional  employees  for  each  union  as  of  accounting 
period  1  each  fiscal  year.  It  does  not  include  EAS,  rural  carriers,  mail  handlers,  etc. 
in  our  counts  since  there  is  no  transitional  category  of  employment  for  those  groups. 
The  report  shows  the  number  of  transitional  employees  currently  on  the  rolls  in 
each  of  our  Performance  Clusters  in  order  of  highest  to  lowest. 

With  regard  to  how  a  transitional  employee  becomes  career,  we  signed  a  Memo- 
randimi  of  Understanding  (MOU)  for  enhanced  career  opportunities  with  the  Na- 
tional Association  of  Letter  Carriers  (NALC)  on  July  30,  1993,  that  gave  NALC 
transitional  employees  an  opportunity  to  take  the  examination  for  career  appoint- 
ment. A  minimum  of  180  days  emplo5nment  in  a  transitional  assignment  is  required 
for  a  transitional  employee  to  take  the  examination.  On  September  24,  1993,  we 
signed  a  similar  MOU  with  the  American  Postal  Workers  Union  which  gave  their 
transitional  employees  two  opportunities  to  take  an  examination. 

Concerning  transitional  employees  understanding  of  our  employment  procedures, 
we  recently  introduced  a  new  battery  examination  which  replaced  four  of  oiu*  older 
examinations.  Because  of  this  change,  Districts  posted  instructions  in  work  places 
with  transitional  employees  for  them  to  sign  up  to  take  the  new  examination.  In 
the  case  of  both  NALC  and  APWU  transitional  employees,  they  are  represented  by 
their  unions,  which  policies  the  appropriate  application  of  the  respective  MOU's 
with  regard  to  career  opportunities. 

Once  transitional  employees  qualify  on  the  examination,  their  names  are  placed 
on  the  competitive  hiring  register  in  regular  rank  and  score  order  along  with  other 
applicants.  This  includes  veteran  preference  points  when  claimed.  Transitional  em- 
ployees are  given  consideration  for  conversion  to  career  status  if  their  scores  come 
within  competitive  reach  on  the  register. 

Question  21.  The  most  recent  GAO  report  on  automation  stated  that  financial  sav- 
ings from  automation  have  been  relatively  small.  Will  overall  savings  from  the  auto- 
mation program  continue  to  be  small?  Has  performance  improved?  If  so,  by  how 
much?  What  steps  is  or  should  the  Postal  Service  take  to  improve  the  performance 
of  your  bUlion  dollar  automation  program? 

Answer.  Since  1989,  the  automation  program  has  avoided  labor  costs  estimated 
at  $5  billion  for  the  Postal  Service  and  its  customers  in  direct  distribution  oper- 
ations that  are  affected  by  automation  (including  accounting  for  $215  million  Re- 
mote Barcoding  System  keying  contract  costs).  This  is  greater  than  the  projected 
cost  avoidance  of  $3.2  bUlion  that  was  included  as  justification  for  the  automation 
equipment  in  the  Decision  Analysis  Reports  approved  by  the  Board  of  Governors. 
Translated  into  potential  costs  to  postal  customers,  the  $5  billion  cost  avoidance  to 
date  is  roughly  the  equivalent  of  three  cents  in  postage  avoided  per  First-Class  let- 


ter.  Without  automation,  the  cost  of  a  First-Class  stamp  could  now  be  about  35 


Workhours  spent  manually  distributing  mail  represent  26.2  percent  of  the  total 
hours  used  in  FY  1994  and  25  percent  of  overall  labor  costs  (salary  and  benefits). 
The  automation  plan  has  always  been  targeted  at  certain  activities  within  these  dis- 
tribution costs  which  can  be  automated,  i.e.,  casing  letters  and  flats.  It  is  not  tar- 
geted, however,  at  every  activity  within  distribution.  Casing  non-automatable  letter 
and  flats  carrier  flats  casing  and  other  non-distribution  time  recorded  in  those  labor 
distribution  codes  (LDCs)  are  examples  of  activities  not  included.  Therefore,  the  sav- 
ings from  automation  may  appear  small  when  compared  to  overall  labor  costs. 

The  overall  savings/cost  avoidance  as  projected  by  the  justification  for  the  automa- 
tion investment  is  expected  to  approximate  $14  to  $15  billion  over  the  next  ten 
years  The  attainment  of  this  projected  cost  avoidance  will  be  assisted  by  delivery 
point  sequencing,  still  in  the  early  deployment  stage,  and  remote  computer  readers 
and  carrier  sequence  barcode  sorters,  in  the  pre-deployment  stages. 

The  estimated  $5  billion  in  direct  distribution  labor  costs  that  have  been  avoided/ 
saved  is  equivalent  to  132,000  workyears  through  1994.  When  allied  labor  costs  are 
factored  into  the  equation,  savings/cost  avoidance  is  reduced  to  a  conservative  $2.5 
billion,  which  is  equivalent  to  69,000  workyears  'saved'  or  avoided  since  1989. 

GAO  has  stated  that  workyears  in  manual  letter  sorting  increased  5.3  percent  m 
1993-  and  2.9  percent  in  1994.  This  included  only  one  mail  processing  activity 
known  as  LDC  14,  and  should  have  included  LDCs  43  and  44  to  present  a  complete 
picture  of  manual  distribution.  The  complete  comparison  shows  much  smaller  in- 
creases of  4.5  percent  in  1993  and  2.6  percent  in  1994  against  a  voliune  growth  of 
2  9  percent  in  1993  and  3.4  percent  in  1994.  However,  over  the  more  vahd,  longer- 
term  period  of  1989-1994,  workhours  in  these  LDCs  declined  by  3.6  percent  yearly. 
Pure  manual  letter  sorting  (excluding  flats)  workhoiu-s  declined  2.7  percent  annu- 
ally, on  average,  against  an  annual  volume  growth  of  1.9  percent  over  the  same  pe- 
riod. .     .      , 

Based  on  the  above,  the  Postal  Service  has  made  positive  achievements  in  imple- 
menting its  automation  program. 

Mr.  McHuGH.  Thank  you,  Mr.  Runyon.  I  appreciate  that. 

If  I  could  just  begin  with  a  few  questions  and  then  go  down  the 
Une  on  the  subcommittee. 

Obviously,  as  you  noted  in  your  testimony  and  as  you  have  said 
in  other  forums,  the  environment  within  which  the  Postal  Service 
operates  has  changed  dramatically  over  the  past  15  years.  Yet  the 
Reorganization  Act  of  1970  has  not  kept  pace  or  at  least  has  not 
changed  along  with  those  developments  in  your  environment. 

In  the  interests  of  trying  to  help  the  subcommittee  think  about 
specifics,  are  you  prepared  or  do  you  have  any  suggestions  as  to 
what  kinds  of  amendments  to  the  Reorganization  Act  might  be 
helpful  to  you  in  achieving  goals  that  you  outline  in  your  testi- 

Mr.  RuNYON.  Mr.  Chairman,  we  don't  have  specific  written  law 
that  we  would  like  to  propose  to  you,  but  we  think  that  what  it 
should  contain  is  help  for  us  to  control  our  costs  better.  We  need 
to  look  at  all  the  areas  of  cost  control  that  we  have  and  look  at  the 
areas  where  we  could  control  better  if  we  didn't  have  the  regula- 
tions that  we  have. 

We  need  to  be  able  to  operate  more  competitively,  and  in  general 
we  just  need  to  run  like  a  business;  and  there  are  several  areas 
that  we  would  like  to  discuss  with  the  committee  and  with  other 
people  in  government  to  determine  how  we  can  get  those  things 
changed.  Some  of  it  may  take  legislation,  some  of  it  may  not,  it 
may  just  take  a  reduction  of  regulations. 

Mr.  McHuGH.  Well,  obviously  we  would  be  very  interested  in  ex- 
ploring those  with  you.  The  principles  and  the  objectives  that  you 
outline,  at  least  it  seems  to  me — and  I  can't  speak  for  the  sub- 
committee members  as  a  whole — are  reasonable.  On  paper  they 


certainly  would  seem  to  represent  something  that  would  be  a  desir- 
able objective  for  us  to  be  of  assistance  to  you,  but  we  would  also 
need  your  guidance  and  your  input.  We  would  be  anxious,  very 
anxious,  at  the  earliest  possible  moment  to  try  to  begin  to  look  at 
those,  and  whether  they  are  regulatory  wherein  we  can  put  some 
sort  of  pressure  or  give  a  sense  of  the  subcommittee  as  to  those 
needed  changes  or  whether  it  would  be  legislative.  We  are  prepared 
to  work  with  you  in  that  regard. 

To  say  that  the  Postal  Service  needs  to  operate  like  a  business 
certainly  makes  sense,  but  there  are  some  unique  factors,  such  as 
express  statutes,  that  insulate  it  from  outside  competition.  Think- 
ing for  a  moment  about  the  process  of  effecting  a  change  in  your 
rate  structure,  I  have  met  with  a  few  of  the  members  of  the  Rate 
Commission.  They  felt  that  given  the  very  clear  and  complex 
charge  that  they  are  given,  that  is,  protecting  the  interests  of  all 
mailers  and  providing  the  people  who  are  most  affected,  your  rate- 
payers, with  the  opportunity  to  participate  in  the  process.  They  feel 
that  going  through  the  hearings  is  an  important  component  of  the 
entire  mechanism. 

How  do  you  think  we  might  restructure  the  ratemaking  process 
so  that  it  reaches  a  balance  of  responding  to  the  interests  of  the 
postal  customers  while  at  the  same  time  providing  you  with  some 
kind  of  flexibility  so  you  can  react  in  a  more  market-oriented  way? 

Mr.  RUNYON.  Well,  I  think  there  are  several  ways  that  could 
happen.  I  have  been  talking  with  the  chairman  of  the  Postal  Rate 
Commission,  Ed  Gleiman,  about  this.  There  are  things  such  as  us 
having  a  product  that  we  want  to  deliver,  and  we  could  do  that  on 
an  experimental  basis  with  their  agreement  and  go  out  and  start 
to  do  that  rather  rapidly,  and  we  are  working  on  how  we  would  set 
about  to  do  that.  If  we  could  do  that,  that  would  be  a  big  help  to 

There  are  things  that  come  to  mind,  and  that  is,  if  we  didn't 
raise  rates  above  the  rate  of  inflation,  that  might  be  another  way 
to  do  that.  In  the  past  our  rates  have  been  above  the  rate  of  infla- 
tion. This  past  rate  increase,  that  we  gave  after  4  years,  was  2 
points  below  the  rate  of  inflation,  and  we  intend  to  keep  our  in- 
creases below  the  rate  of  inflation. 

So  I  think  there  are  several  ways  that  we  could  agree  together 
to  do  that,  and  I  am  going  to  be  meeting  with  the  chairman  of  the 
Postal  Rate  Commission.  He  is  anxious  to  meet,  and  I  am  anxious 
to  meet,  so  we  can  discuss  those  things  and  find  out  how  far  we 
can  go  without  legislation,  because  that  would  be  the  best  way  to 
do  it. 

Mr.  McHuGH.  So  in  other  words,  what  you  are  at  least  discuss- 
ing now  would  be  a  system  wherein,  if  the  proposed  rate  increase 
were  below  the  determined  rate  of  inflation,  there  would  be  no 
hearing  process  at  all? 

Mr.  RuNYON.  I  am  saying  that  is  one  approach  that  we  could 
take.  I  don't  know  that  the  Postal  Rate  Commission  would  like 
that,  but  that's  an  approach  that  I  think  that  we  might  be  able  to 
look  at;  and  I  think  that  there  are  others  that  we  need  to  look  at, 
but  we  need  to  meet  with  the  Postal  Rate  Commission  and  have 
those  discussions  and  then  come  back  with  you  and  tell  you  where 
we  are. 


Mr.  McHuGH.  Well,  we  would  await  that  input  as  well,  and  there 
again,  where  you  have  the  opportunity  to  negotiate  with  the  Rate 
Commission  is  certainly  of  interest  to  the  subcommittee,  but  that 
is  at  least  at  the  first  instance  between  you  and  the  commission. 
But  I  am  concerned  with  legislative  inhibitors  that  we  could  make 
changes  to  accommodate  that  balance  because  I  believe  that  the 
people  of  this  Nation  and  the  postal  customers,  should,  in  particu- 
lar, have  some  opportunity  to  respond  to  your  proposals  of  rate  ad- 
justments. Providing  that  flexibility  would  be  important. 

I  have  any  number  of  other  questions,  but  I  know  the  other 
Members  do  as  well,  and  I  would  at  this  time  yield  to  the  ranking 
minority  member,  the  gentlelady  from  Michigan,  Miss  Collins. 

Miss  Collins  of  Michigan.  Thank  you,  Mr.  Chairman. 

I  have  about  three  questions  I  want  to  ask  you. 

In  your  statement  you  said  with  the  right  changes  in  the  laws 
and  regulations  we  can  continue  to  provide  the  communications, 
safety  net,  and  you  have  spoken  about  the  need  for  legislation  quite 
often  publicly,  and  just  be  more  specific.  What  do  you  want  in  legis- 

Mr.  RUN^YON.  Well,  what  we  want  is  to  accomplish  the  things 
that  I  think  we  need  to  do.  We  need  flexibility  in  our  operation.  We 
need  to  be  free  to  operate  like  a  business.  We  need  to  be  free  to 
make  financial  investments  that  are  appropriate  for  a  $55  billion 
company  to  make. 

Miss  Collins  of  Michigan.  So  to  this  point  you  cannot  make  in- 
vestments? At  this  point? 

Mr.  Rl^'YON.  No.  The  Treasury  Department  oversees  us  in  that 

Miss  Collins  of  Michigan.  Do  you  get  the  results  of  it? 

Mr.  Rlhs-yon.  Well,  let  me  let  Mike  Coughlin  mention  that.  He 
knows  more  about  that  subject. 

Mr.  Coughlin.  The  Treasury  does  control  basically  all  aspects  of 
our  investments  of  excess  funds  in  the  postal  fund  itself,  and  right 
now  we  are  limited  to  investment  in  nonmarketable  Treasury  secu- 
rities at  a  market  rate  that  is  tied  to  things  on  the  market,  and 
we  do  retain  the  earnings  off  of  that. 

I  think  part  of  what  Mr.  Runyon  is  referring  to  is  the  flexibility 
and  some  of  the  opportunities  that  exist  beyond  that  very  narrow 
opportunity  to  use  those  funds.  I  think  there  are  a  lot  of  opportuni- 
ties out  there,  particularly  in  today's  marketplace,  that  are  safe  but 
at  the  same  time  have  the  potential  to  pay  off  for  the  Postal  Serv- 

Miss  Collins  of  Michigan.  You  would  have  lost  your  shirt  last 
year  if  you  had  that  flexibility,  along  with  the  rest  of  us. 

Mr.  Coughlin.  This  isn't  Orange  County. 

Miss  Collins  of  Michigan.  GAO  has  found  that  black  males  in 
the  Postal  Service  were  four  times  more  likely  to  be  investigated 
by  the  Postal  Inspection  Service  for  narcotics  violations  than  white 
males.  We  had  a  hearing  on  that,  I  believe.  Have  you  investigated 
this  disparate  treatment? 

Mr.  Ru'NYON.  Yes,  we  have,  and,  as  you  are  familiar,  since  the 
Cleveland  sting  operation,  we  have  changed  the  way  we  do  those 
investigations.  We  don't  have  people  that  we  hire,  paid  informants, 
any  more.  I  don't  think  that  our  investigations  are  racially  biased. 


We  do  have  reports  from  the  Inspector  General  to  the  board  on  a 
recurring  basis  to  make  sure  that  we  have  accomplished  what  we 
need  to  accomplish  in  that  regard. 

Miss  Collins  of  Michigan.  So  it  is  not  racial,  it  is  just  happen- 
stance that  they  investigate  more  blacks  than  whites? 

Mr.  RUNYON.  Yes.  We  have  investigated — of  the  investigations 
that  we  have  had,  91  percent  of  the  cases  that  we  have  presented 
to  the  Attorney  General,  they  have  accepted.  And  93  percent  of  the 
ones  accepted  have  had  favorable  rulings  against  the  people  who 
were  guilty  of  drugs.  So  I  think  they  are  doing  a  fairly  good  job  of 
how  they  go  about  it. 

Miss  Collins  of  Michigan.  I  understand  that  the  Diversity  De- 
partment covers  more  than  affirmative  action.  What  other  areas 
are  covered  by  this  department? 

Mr.  RuNYON.  Well,  they  are  responsible  for  helping  all  of  our  op- 
erations in  the  field  set  up  programs  to  make  sure  that  we  have 
diversity  in  the  total  area.  We  have  diversity  in  our  purchasing,  in 
our  facilities  arena,  and  they  are  responsible  to  make  sure  that  we 
have  got  programs  set  up  and  follow  that. 

I  might  say  that  the  Postal  Service  is  probably  the  most  diverse 
organization  in  Government  and  perhaps  in  the  country. 

Miss  Collins  of  Michigan.  Do  they  have  enough  resources  in 
the  field  to  do  their  job? 

Mr.  RuNYON.  Yes,  they  have  enough  resources,  and  as  a  matter 
of  fact  we  are  adding  some  resources  in  the  field. 

Mike,  will  you  tell  us  how  many? 

Mr.  COUGHLIN.  Right  now.  Miss  Collins,  we  are  in  the  process  of 
adding  25  additional  diversity  development  specialists  so  that  we 
have  at  least  one  in  every  one  of  our  districts  around  the  country. 
We  will  have  a  total  of  85  at  that  point. 

Miss  Collins  of  Michigan.  What  does  the  diversity  vice  presi- 
dent have  in  terms  of  making  changes  or  implementing — what  level 
of  authority  does  the  vice  president  have  in  terms  of  making 
changes,  especially  where  the  people  might  not  accept  change? 

Mr.  RuNYON.  He  has  the  authority  at  this  time  to  set  programs 
up,  to  recommend  actions  to  people.  He  has  the  authority  of  course 
to  come  to  me,  since  he  reports  directly  to  me,  if  he  is  not  getting 
the  right  cooperation  that  he  needs.  He  does  not  have  the  authority 
to  override  all  of  the  operating  managers  in  the  company. 

Mr.  Henderson.  I  might  add  to  that  that  the  real  responsibility 
for  diversity  rests  with  the  line  managers  who  make  those  selec- 
tions. This  is  in  reality  not  a  staff  function  all  of  the  burden  does 
not  lie  on  our  diversity  vice  president,  it  really  is  on  the  shoulders 
of  people  that  report  to  me  all  the  way  down  through  the  Postal 
Service  to  keep  diversity  in  mind,  and  Bob  really  acts  as  a  very 
close  advisor  to  us  in  accepting  that  responsibility. 

Miss  Collins  of  Michigan.  Thank  you,  Mr.  Henderson. 

I'll  save  the  rest  of  my  questions. 

Mr.  McHuGH.  Thank  you.  Miss  Collins. 

I  yield  to  the  vice  chairman,  the  gentleman  from  South  Carolina, 
Mr.  Sanford. 

Mr.  Sanford.  Mr.  Runyon,  we  touched  on  this  during  our  last 
visit,  and  I  want  to  revisit  it.  After  listening  to  your  testimony,  and 
that  is,  as  I  heard  you  go  through  the  different  friction  points  in 


terms  of  running  the  post  office  effectively,  what  I  heard  was  a  real 
desire  for  flexibility,  the  need  to  be  able  to  shift  as  different  situa- 
tions came  along,  a  real  desire  to  be  free  to  make  your  own  finan- 
cial investments  as  you  saw  fit,  a  desire  to  be  free  of  the  red  tape 
and  rules  that  have  burdened  you  in  terms  of  collective  bargaining, 
a  need  to  do  price  setting  on  your  own.  Right  now  the  mechanism 
is  so  slow  and  so  inflexible. 

Many  would  argue,  well,  if  these  are  the  things  that  you  need, 
why  not  privatize  the  post  office?  Wouldn't  that  be  an  effective  ve- 
hicle for  allowing  you  the  freedom  that  you  need?  What  is  wrong 
with  that  argument?  And,  again,  I  am  not  speaking  on  behalf  of 
any  of  my  fellow  subcommittee  members  but  just  in  terms  of  fol- 
lowing that  rationale  out. 

Mr.  RuNYON.  Well,  if  you  mean  by  privatizing  the  post  office  to 
put  a  "for  sale"  sign  in  the  window  of  every  post  office  and  sell  it 
to  the  highest  bidder,  I  would  be  very  much  against  it.  I  don't  think 
that  there  is  an  organization  or  company  in  this  country  that  is 
supported  by  Wall  Street  that  is  capable  of  doing  what  we  do,  giv- 
ing a  universal  service,  a  universal  price  to  every  citizen  in  the 
United  States  and  territories  also. 

If  you  mean  though  by  that  term  that  you  would  like  to  commer- 
cialize the  Postal  Service  so  that  we  could  operate  more  like  a  pri- 
vate corporation — which,  by  the  way,  the  law  stated  in  the  begin- 
ning that  is  the  way  it  should  be.  We  should  be  a  government  agen- 
cy but  run  like  a  private  corporation — but  we  are  not  allowed  to  do 
that — then  if  that  is  what  you  mean,  then  I  would  be  very  much 
in  favor  of  it.  As  a  matter  of  fact,  that  is  what  we  are  aslung  for. 

Mr.  Sanford.  So  in  essence  you  are  asking  for  partial  privatiza- 
tion, so  to  speak,  privatization  of  maybe  different  functions. 

Mr.  RuNYON.  I  don't  like  to  call  it  privatization.  I  like  to  call  it 
commercialization.  Privatization  has  a  bad  connotation  to  employ- 
ees in  the  Postal  Service,  and  I  don't  like  that  term. 

Mr.  Sanford.  Sure. 

Mr.  RuNYON.  You  like  it,  but  I  don't. 

Mr.  Sanford.  No,  I'm  not  saying  that  I  necessarily  like  it  at  all. 
I  just  know  the  folks  back  home,  one  of  the  things  they  consistently 
get  frustrated  with  is,  they  look  at  the  consistent  chains  that  any- 
body who  works  within  Government  has  to  work  with,  and  they 
keep  sa)dng,  "Mark,  why  don't  you  have  this  function  or  that  func- 
tion or  a  post  office  free  of  those  constraints  that  government  al- 
ways entails?" 

Mr.  RuNYON.  Well,  that's  what  we  are  asking  for,  free  us  of  those 
restraints,  and  we  will  operate  it  much  better. 

Mr.  Sanford.  I  have  got  other  questions,  but,  again,  let  me  defer 
to  my  fellow  members. 

Mr.  McHuGH.  The  gentleman  from  New  York,  Mr.  Oilman. 

Mr.  Oilman.  Thank  you,  Mr.  Chairman. 

I  thank  the  Postmaster  Oeneral  and  Mr.  Henderson  and  Mr. 
Coughlin  for  coming  in  and  giving  us  the  best  of  your  thinking. 

I  want  to  commend  the  Postal  Service,  first  of  all,  for  coming  out 
in  black  instead  of  the  red,  and  one  of  the  things  that  I  have  been 
concerned  about  over  the  years  is  the  reserve  that  the  Postal  Serv- 
ice has.  Can  you  tell  us  a  little  bit  about  where  you  are  on  the  re- 
serve right  now?  And  I  think  your  equity  has  declined  to  $6  bil- 


lion — declined  some  $6  billion  since  1986,  and  a  lot  of  that  hap- 
pened during  the  past  couple  of  years.  Can  you  tell  us  what  your 
thoughts  are  about  that  reduction  in  equity? 

Mr.  RUNYON.  Yes.  We  think  that  we  need  to  get  rid  of  the  nega- 
tive equity.  We  are  setting  in  place  programs  to  do  that.  It  won't 
be  done  overnight.  To  do  it  overnight  would  mean  we  would  have 
to  go  for  a  very  large  rate  increase  to  write  that  off.  But  we  are 
dedicated  to  not  running  a  negative  profit,  or  a  loss. 

The  way  that  the  rates  have  been  set  in  the  Postal  Service  is 
normally  on  a  3-year  cycle.  You  figure  it  on  a  case  year,  you  figure 
that  year  out.  You  take  the  economics  of  that  year,  and  so  that  is 
what  the  postage  stamps  come  out  to  be.  That  means  that  the  first 
year  that  new  rate  is  in  effect,  you  are  profitable;  the  second  year 
you  break  even;  and  the  third  year  you  run  a  loss.  Well,  that  loss, 
you  know,  goes  to  the  negative  equity. 

Mr.  Oilman.  What  can  we  do  to  correct  that? 

Mr.  RuNYON.  Well,  what  we  intend  to  do  is  not  run  a  loss.  I 
think  we  need  to  do  what  we  have  to  do  to  never  run  a  loss  again. 
We  just  made  a  change  in  rates  on  January  first  of  this  year.  At 
the  present  time  we  are  $500  million  ahead  of  that,  and  we  think 
we  are  going  to  do  better  than  that.  Our  indications  are  that  next 
year  we  will  also  have  a  profit. 

Mr.  Oilman.  Providing  we  don't  skim  out  that  amount  for  pre- 

Mr.  RuNYON.  Well,  if  you  take  $11.6  billion  out,  you  will  raise 
the  equity  by  $11.6  billion.  So  that  is  one  way  to  keep  that  equity 
down,  is  to  not  take  the  $11.6  billion  because  it  will  go  right  to  our 
bottom  line. 

Mr.  Oilman.  It  will  reduce  the  equity,  not  raise  it — the  deficit. 
I  think  you  misspoke. 

Mr.  Runyon.  Well,  it  will  be  more  negative  equity. 

Mr.  Oilman.  Yes. 

Mr.  Runyon.  It  will  go  from  6  to  11. 

Mr.  Oilman.  Yes. 

Mr.  Runyon.  And  $11.6  would  be  $17.6  that  negative  equity 
would  become.  So  naturally  we  are  going  to  have  to  go  and  raise 
rates  in  that  event. 

Mr.  Oilman.  What  can  we  do  about  cutting  back  on  the  time  of 
raising  rates  in  the  consideration  by  the  Postal 

Mr.  Runyon.  Well,  what  we  are  doing  now  is  that  we  raised  our 
rates.  We  think  that  this  rate  increase  will  last  for  2  years  before 
we  would  have  to  take  a  loss.  If  we  do  a  better  job  of  improving 
our  productivity  and  things  of  that  nature,  we  might  go  3  years 
without  a  loss,  but  we  need  to  look  at  that  and  make  sure  that  if 
we  are  going  to  have  a  loss  then  we  have  to  go — oh,  we  have  to 
make  that  decision  probably  10  months  for  the  Commission  and 
probably  4  months  for  us.  So  about  14  months  ahead  we  have  to 
make  a  decision,  are  we  going  to  make  a  profit  the  third  year  or 
not?  If  we  are  not,  we  are  going  to  have  to  go  in  for  a  rate  increase. 

Mr.  Oilman.  And  that  is  pretty  difficult  to  predict  at  that  length 
of  time,  is  it  not? 

Mr.  Runyon.  Well,  a  lot  of  things  can  happen  in  14  months. 

Mr.  Oilman.  What  can  we  do  to  shorten  the  time  consideration 
of  rates  by  the  Postal  Rate  Commission?  You  talk  about,  it  needs 


to  be  simplified.  What  are  your  thoughts  about  how  to  go  about 

Mr.  RUNYON.  Well,  I  think  that  the  amount  of  time  that  is  put 
into  that  should  be  cut  back;  and  there  are  a  lot  of  ways  to  do  that, 
and  they  would  be,  you  know,  perhaps  have  less  time  for  interven- 
tion, have  people  prepared  and  do  a  faster  job.  I  think  the  Postal 
Rate  Commission  would  be  in  a  better  position  to  explain  how  they 
could  cut  times. 

Now  they  did  a  good  job  for  us  and  with  us  on  this  last  rate  in- 
crease. They  cut  the  time  to  9  months,  and  that  was  very,  very 
helpful  to  us,  and  we  are  very  appreciative  to  them  for  doing  that. 
So  we  need  to  work  together  to  figure  out  how  best  to  do  that,  and 
then  when  we  figure  that  out  we  will  get  back  with  you. 

Mr.  Oilman.  You  talk.  Postmaster  General,  about  reexamining 
the  Postal  Reorganization  Act  to  try  to  make  it  more  businesslike. 
Any  specific  recommendations  with  regard  to  the  act  itself? 

Mr.  RuNYON.  Well,  I'm  not  prepared  to  give  specifics  now,  but 
the  thing  that  we  need  to  address  is  how  we  are  affected  by  various 
other  agencies  in  the  U.S.  Government.  For  example.  Office  of  Per- 
sonnel Management  sort  of  controls  how  we  deal  with  people  to  a 
certain  degree.  Merit  System  Protection  Board  is  an  appeal  process 
that  we  go  through.  We  can't  go  to  the  Merit  System  Protection 
Board  ourselves  as  management  of  the  Postal  Service,  we  have  to 
go  through  OPM.  If  OPM  agrees  with  us,  then  they  carry  it  for- 
ward. If  they  don't,  it  doesn't  go  forward.  So  if  we  could  get  more 
control  over  what  we  do,  if  we  weren't  under  the  office  of  OPM  for 
example,  that  would  be  very  good.  Now  the  person,  the  head  of  the 
Office  of  Personnel  Management,  I  think  agrees  with  me  on  that. 

Mr.  Oilman.  I  would  hope  you  might  send  some  of  these  rec- 
ommendations to  our  subcommittee,  and  we  would  welcome  consid- 
ering them.  I'm  sure  the  chairman  would  welcome  having  those. 

Mr.  RuNYON.  OK. 

Mr.  Oilman.  Just  one  other  thought,  and  I  know  my  time  is  run- 
ning. Some  of  our  postmasters  whom  we  met  with  during  this  past 
week  have  said  they  need  a  little  more  flexibility,  they  are  getting 
too  many  regulations  that  hamper  their  efficient  operations,  and 
have  you  looked  at  that  at  all?  They  feel  that  the  amount  of  regula- 
tions being  imposed  on  them  restricts  their  efficiency. 

Mr.  Runyon.  We  certainly  do  look  at  that.  We  need  to  look  at 
it  more.  A  lot  of  those  regulations  they  are  talking  about  we  inflict 
on  them,  not  Congress  or  anybody  else,  it's  us,  and  we  are  improv- 
ing that.  We  have  done  better,  but  we  need  to  do  more.  We  are  cer- 
tainly not  through. 

Mr.  Oilman.  I  would  hope  you  might  meet  with  a  group  of  post- 
masters just  to  review  some  of  those.  I  think  it  could  be  helpful  to 
them  and  to  the  Postal  Service. 

Again,  we  thank  you  for  appearing,  and  we  hope  together  we  can 
help  make  our  process  more  efficient  and  make  it  more  financially" 

Thank  you. 

Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  Thank  you. 

The  gentleman  from  Connecticut,  Mr.  Shays. 


Mr.  Shays.  Thank  you,  and  thank  you,  Mr.  Postmaster,  again  for 
being  here. 

I  am  going  to  ask  you  a  number  of  questions.  They  may  not  re- 
quire too  long  an  answer. 

First,  to  make  a  point  to  you,  I  believe  the  prefunding  of  the 
health  care  benefits  is  a  dead  issue.  I  serve  on  the  Budget  Commit- 
tee, where  I  headed  that  task  force  overseeing  the  health  care 
issue,  and  we  would  strongly  oppose  it.  It  really  is  a  gimmick  that 
the  Congressional  Budget  Office  has  suggested,  and  I  think  they 
have  retracted  their  recommendations,  so  I  don't  think  it  has  sup- 
port, and  I  don't  think  it  would  pass. 

Mr.  RUNYON.  I  am  glad  to  hear  that. 

Mr.  Shays.  With  regard  to  mail  being  delivered,  quite  often  in 
my  area,  in  New  England,  the  carriers  don't  get  out  until  9:30  to 
10:30,  and  I  have  just  often  wondered  why  we  couldn't  get  them 
out  at  8:30  a.m.  Is  that  a  goal?  What  is  the  goal  of  when  you  get 
the  carriers  out  delivering  mail? 

Mr.  RuNYON.  I  would  like  to  ask  Bill  Henderson  to  respond  to 
that  since  he  is  responsible  for  that  part  of  the  operation. 

Mr.  Henderson.  The  carriers  have  basically  two  roles  during  the 
day.  The  first  is  to  sort  their  mail  in  the  order  of  delivery;  and  de- 
pending on  the  arrival  time  of  that  mail,  that  is  the  time  that  they 
are  allowed  to  sort  their  mail  and  then  go  to  the  street.  With  the 
advent  of  automation,  we  are  opening  greater  processing  windows 
within  the  plants,  and  the  carriers  are  leaving  later  for  the  street. 

Mr.  Shays.  What  is  the  goal  of  getting  them  out,  by  what  time? 

Mr.  Henderson.  Generally  by  about  11  o'clock. 

Mr.  Shays.  Yes.  Why  so  late? 

Mr.  Henderson.  Because  we  need  the  processing  window  to  se- 
quence the  mail  for  them. 

Mr.  Shays.  Well,  why  not  just  tell  them  to  start  earlier?  My 
sense  is,  if  the  post  office  were  truly  competing  with  another  post 
office  you  would  have  your  people  out  by  9  o'clock,  you  would  re- 
structure the  system,  and  you  would  get  your  workers  there  sooner, 
and  you  would  get  the  mail  flowing  sooner  to  get  them  out.  So  I 
guess  I'm  just  curious,  why  you  wouldn't  have  an  earlier  goal. 

Mr.  Henderson.  It  is  a  function  of  the  processing  window  that 
you  have  to  sort  the  mail.  You  collect  it — it  begins  at  the  collection 
point — ^you  collect  it  at  the  conclusion  of  business  in  America, 
which  is  sometime  after  5  o'clock,  and  then  you  have  from  that 
point  on  to  get  it  to  its  destination,  and  then  to  get  it  in  delivery 

It  is  possible  to  restructure  routes.  For  example,  in  many  areas 
of  the  country — we  are  looking  at  that — to  get  business  mail  earlier 
in  the  day  to  businesses — and  I  think  that  is  the  driving  force  for 
earlier  delivery.  But  residential  mail,  for  people  who  are  at  work, 
for  example,  we  have  extended  that  delivery  time  to  try  to  recon- 
struct those  routes  and  provide — they  will  be  provided  later  deliv- 

Mr.  Shays.  The  GAO,  I  guess  today,  is  talking  about  the  whole 
issue  of  your  automation  system  that  was  to  presort  the  letters  so 
the  carriers  could  spend  2  hours  less  sorting  out  the  mail.  Are  you 
in  agreement  with  this  report?  We  will  be  hearing  later  from  them. 


Mr.  Henderson.  Well,  to  a  degree,  and  I  haven't  spent  a  great 
deal  of  time  yet  studying  that  report,  but  to  the  degree  that  they 
talk  about  the  complexity  of  implementing  automation,  we  are  in 
agreement.  But  we  think  in  terms  of  the  gains  for  the  Postal  Serv- 
ice. If  you  go  back,  for  example,  and  take  automation  out  of  the 
system,  we  know  what  mail  volumes  and  what  work  load  we  had; 
if  you  go  back  to  1988  and  you  take  automation  out  of  the  system, 
we  would  have  spent  in  excess  of  $5  billion  more  money. 

Mr.  Shays.  Let  me  ask  you  then  more  specifically  because  time 
will  run  out,  are  we  behind  schedule  in  this  process? 

Mr.  Henderson.  Yes. 

Mr.  Shays.  OK.  Do  you  have  special  plans  to  bring  us  back  in 
line,  or  have  you  readjusted  your  timeframes? 

Mr.  Henderson.  We  have  readjusted  the  timeframes. 

Mr.  Shays.  What  has  been  the  biggest  cause  of  the  delay? 

Mr.  Henderson.  Two  causes.  The  first  cause  is  the  multiline  op- 
tical character  reader  actually  not  performing  as  we  thought  it 
would,  along  with  some  bypassing  of  GMF's  by  mailers  because  of 
some  logistics  changes;  and  the  second  reason  is,  the  remote  encod- 
ing was  delayed.  It  was  involved  in  a  major  labor  dispute  and  a 
major  review  by  the  board. 

Mr.  Shays.  Am  I  right  in  assuming  though  that  if  you  could  get 
the  system  to  work  in  your  post  office  systems,  that  you  will  have 
the  carriers  spending  more  time  delivering  and  getting  out  sooner? 

Mr.  Henderson.  That  is  correct. 

Mr.  Shays.  If  I  could  have  just  a  few  more  seconds  here,  just 
some  very  simple  things  that  maybe  you  get  asked  often.  Does  first 
class  cover  subsidized  third  class,  as  my  constituents  assume? 

Mr.  Henderson.  No. 

Mr.  Shays.  OK.  So  basically  every  pricing  mechanism  carries  its 
own  weight? 

Mr.  Henderson.  That  is  the  requirement  of  the  rate  process,  yes. 

Mr.  Shays.  I  have  other  questions,  but  I  will  yield  back  my  time, 
and  thank  you  very  much. 

Could  I  just  ask  one? 

Mr.  McHuGH.  Certainly. 

Mr.  Shays.  There  was  a  report  last  year  by  the  GAO  critical  of 
the  postal  system.  Mr.  Runyon,  how  have  you  responded  to  that? 
Am  I  accurate  on  that  issue? 

Mr.  Runyon.  Are  you  talking  about  the  labor-management  rela- 
tions report? 

I  think  the  report  was  pretty  well  on  target.  We  need  to  improve 
our  labor-management  relations,  and  we  are  setting  about  to  do 
that.  As  a  matter  of  fact,  in  a  hearing  that  we  had  with  the  Senate 
last  year,  I  asked  that  a  summit  meeting  be  held  between  all  of  the 
labor  unions  and  the  management  associations  in  the  Postal  Serv- 
ice, and  we  still  would  like  to  have  that  summit.  At  the  present 
time  we  have  got  three  labor  unions  that  don't  wish  to  enter  into 
that  summit,  and  they  would  like  to  wait  until  the  negotiations  are 
over,  which  are  not  over.  I  am  very  anxious  to  get  into  that  and 
to  sit  down  with  all  concerned  and  try  to  figure  out  a  better  way 
to  operate  than  what  we  have  been  operating  with  for  many,  many 

Mr.  Shays.  Thank  you  very  much. 


Mr.  McHuGH.  Thank  you. 

As  a  follow-up  to  that,  as  I  recall,  the  GAO  recommended  that 
you  seek  outside  help.  Perhaps  this  is  what  you  were  just  referring 
to.  Have  you  requested  help  from  anyone  like  the  Federal  Medi- 
ation and  Conciliation  Service  to  assist  in  your  forging  a  long-term 

Mr.  RuNYON.  Yes,  we  have.  As  a  matter  of  fact,  we  would  have 
desired  to  have  some  people  from  the  Federal  Mediation  Board  to 
sit  in  on  negotiations,  but  that  wasn't  possible.  We  couldn't  reach 
agreement  with  our  unions  to  have  that  happen.  I  think  that  would 
be  a  very  good  way  for  us  to  work  on  that. 

At  the  present  time,  we  are  meeting  with  the  Federal  Mediation 
Board  and  one  of  our  unions  to  try  to  reach  agreement  without 
having  to  go  to  arbitration.  So,  yes,  we  are  very  much  in  favor  of 
having  the  mediation  board  involved  in  any  discussions  that  we 
have  along  this  nature.  We  think  that  would  be  very  constructive. 

Mr.  McHuGH.  How  is  your  current  mediation  progressing? 

Mr.  RuNYON.  Slowly. 

Mr.  McHuGH.  Slowly. 

You  mentioned  the  arduous  process,  in  your  view,  of  obtaining  a 
rate  increase  and  how  you  have  to  prospectively  look  down  the  road 
and  because  of  the  length  of  time  it  takes,  14  months  I  believe  you 
said,  you  have  to  contemplate  rate  increases  very  early  on.  Are  you 
contemplating  a  rate  increase  at  this  time  for  the  future? 

Mr.  RuNYON.  No,  we  are  not  contemplating  a  rate  increase  right 
now.  The  $11.6  billion  would  force  us  into  an  immediate  rate  in- 
crease, but  hopefully  we  won't  have  to  do  that. 

Mr.  McHuGH.  I  certainly  take  the  gentleman  from  Connecticut's 
word  on  that,  but  let's  think  about  it  for  the  moment.  You  have  ex- 
pressed a  very  understandable  concern  about  what  that  prefunding 
requirement  would  do  to  the  price  of  a  stamp.  Dream  with  me  a 
nightmare,  if  you  will,  from  your  view  and  many  others  if  indeed 
the  prefunding  had  a  clause  in  it  that  prohibited  you  from  passing 
any  of  that  along  to  stamp  and  you  would  have  to  take  that  out 
of  operating.  What  kinds  of  steps  would  that  require  you  to  take? 
Have  you  even  had  a  thought  about  that? 

Mr.  RuNYON.  I  haven't  had  that  nightmare  yet,  but  I  tell  you,  it 
would  be  very  bad  for  service  for  customers.  Regardless  of  how  we 
did  it,  it  is  going  to  affect  service.  I  haven't  really  tried  to  figure 
out  the  many  different  ways  that  we — or  steps  we  would  have  to 
take  to  do  that,  but  it  would  be  tremendous  to  reduce  a  $55  billion 
budget  by  20  percent  in  1  year.  That  would  be  very  hard  to  do.  It 
would  be  very  hard  for  any  private  company  to  do.  Private  compa- 
nies have  a  little  more  leeway  in  what  they  can  do.  For  example, 
they  might  lay  off  20  percent  of  their  operations;  a  private  company 
might  close  down  20  percent  of  their  plants;  we  can't  do  that.  So 
it  would  be  a  little  more  disastrous  for  us  than  it  would  be  for  a 
private  company. 

Mr.  CouGHLiN.  I  might  add  to  that,  Mr.  Chairman,  I  was  here 
in  1987  when  the  OBIIA  that  year  was  passed,  and  one  of  the  pro- 
visions of  this  limited  the  Postal  Service;  and  I  think  it  hit  us  for 
about  $700  million,  $700  million  as  opposed  to  $11.6  billion.  It 
forced  us  into  some  operating  actions  that  really  had  a  devastating 
effect  on  the  system.  We  were  forced  to  hold  off,  for  example,  en- 


tirely  on  our  capital  building  program,  and  to  this  day  there  are 
post  offices  out  there  that  have  not  been  built  that  are  badly  need- 
ed because  of  an  action  that  took  place  in  1987  that  involved  over 
$700  million. 

So  I  think  you  can  see  what  the  magnitude  of  the  kind  of  impact 
that  might  have  if  you  multiplied  that  by  some  15  times  and  put 
it  up  in  the  $11  or  $12  billion  range.  It  would  be  devastating  to 
the  system. 

Mr.  McHuGH.  Fine.  Thank  you. 

Mr.  Runyon,  you  are  a  member  of  the  11-member  Board  of  Gov- 
ernors that  oversees  Postal  Service  operations.  That  structure  was 
established,  again,  like  most  of  what  you  do  today,  back  in  1970. 
How  well  do  you  feel  that  Board  of  Governors  structure,  particu- 
larly as  it  interfaces  with  the  charge  that  you  have  before  you  in 
running  the  day-to-day  operations  of  the  Postal  Service,  works  in 
today's  world? 

Mr.  Runyon.  I  think  it  works  very  well.  It  works  like  a  board 
of  directors  in  any  company.  At  Ford  Motor  Co.,  where  I  worked 
for  a  long  time,  we  had  a  board  of  directors.  Some  were  outside 
members,  and  some  were  inside  members.  We  have  two  inside 
members  on  that  board,  and  we  have  nine  outside  members.  The 
membership  doesn't  change  rapidly,  as  you  know,  because  each 
member  is  appointed  to  a  9-year  term,  and  so  there  is  one  new 
member  appointed  every  year.  So  there  is  no  rapid  change  on  that 
board  that  would  cause  it  to  come  in  and  change  all  the  policies 
that  have  been  established  by  a  future  board — or  a  past  board.  So 
I  think  it  works  very  well.  It  works  like  any  private  organization 
would  work. 

Mr.  McHuGH.  So  with  respect  to  that  portion  of  the  1970  Act, 
you  wouldn't  contemplate  any  kinds  of  changes  to  the  statute? 

Mr.  Runyon.  No,  I  don't  think  that  that  is  necessary  at  all. 

Mr.  McHuGH.  OK.  Good. 

Again,  I  have  other  questions,  but  I  would  yield  to  Miss  Collins. 

Miss  Collins  of  Michigan.  Mr.  Chairman,  with  your  approval 
I  would  rather  deal  with  the  rest  of  mine  in  writing  because  we 
still  have  Mr.  Motley  to  testify. 

Mr.  McHuGH.  Yes,  we  do. 

Miss  Collins  of  Michigan.  If  it  is  all  right  with  you? 

Mr.  McHuGH.  Without  objection,  certainly. 

Mr.  Sanford. 

Mr.  Sanford.  Two  quick  questions.  One:  Many  have  argued  that 
what  you  are  really  in  is  not  the  postal  business  but  the  informa- 
tion business  and  that,  as  such,  there  is  increasing  competition  in 
the  information  business,  whether  it  is  e-mail  or  cost  of  phone  rate 
coming  down,  and  that  therefore,  given  the  constraints  under 
which  you  operate  and  your  rising  price  relative  to  their  falling 
price — ^I  am  not  saying  your  price  is  rising,  but  relatively  speak- 
ing— ^that  the  post  office  may  go  the  way  of  the  buggy  whip  if  we 
don't  do  radical  surgery  to  the  way  that  you  all  operate.  Do  you  buy 
into  that  theory,  or  no? 

Mr.  Runyon.  Well,  that's  a  theory  that  has  been  around  for  a  lot 
of  years.  You  know,  for  example,  when  telegraph  was  invented  peo- 
ple said  the  Postal  Service  is  going  out  of  business;  telephone  came 
in,  the  same  thing.  Computers  came  in  20  years  ago,  and  they  said 


that  is  the  end  of  the  Postal  Service.  We  have  continued  to  in- 
crease. Our  volume  right  now  is  increasing.  We  increased  over  the 
last  2  years  a  little  over  6  percent,  something  like  6.5  percent.  This 
year  our  volume  has  increased  5.3  percent. 

Now  having  said  that,  we  are  losing  portions  of  our  mail.  On  our 
financial  and  transaction  mail,  we  have  lost  35  percent  of  that  in 
the  last  5  years,  and  we  expect  to  lose  another  35  percent  in  the 
next  4  or  5  years.  That  is  business-to-business  mail.  And  we  expect 
to  continue  to  lose  that,  but  we  are  increasing  mail  in  customer- 
to-business  and  business-to-customer.  That  mail  is  increasing,  and 
it  is  increasing  a  lot  more  than  what  we  are  losing.  I  think  that 
there  will  be  more  of  that  going  on.  I  think  we  will  probably  be  in 
a  part  of  that  business. 

For  example,  several  agencies  in  the  Federal  Government  have 
come  up  to  us  and  said  we  would  like  to  work  with  you  and  set 
up  a  way  to  communicate  through  the  post  office,  and  we  have  de- 
signed some  kiosks.  And  we  are  in  the  process  of  putting  about  a 
hundred  of  those  out  in  various  post  offices  and  see  how  they  oper- 
ate so  people  can  deal  with  Social  Security,  deal  with  the  Veterans' 
Administration  through  that  kiosk  in  the  post  office,  arranging  so 
they  can  actually  get  checks  through  there.  So  with  a  smart  card, 
they  can  put  the  smart  card  in  there  and  get  their  check,  and  so 
a  check  doesn't  have  to  be  written.  So  some  of  that  business  is 
going  to  go  away.  But  then,  on  the  other  hand,  that  kiosk  provides 
revenue  for  the  Postal  Service. 

So  there  are  things  like  that  that  we  are  looking  at  because  we 
are  in  the  communications  business.  We  are  having  companies 
come  to  us,  large  communication  companies,  and  say  we  need  some 
help  because  we  can  communicate  with  ourselves  and  do  it  in  a 
coded  way,  but  when  we  want  to  communicate  with  another  com- 
pany it  has  to  go  over  the  open  wires  and  anybody  can  reach  out 
and  grab  it.  Well,  we  can  put  a  postmark  on  there,  electronic  post- 
mark, and  then  they  can't  reach  out  and  do  that.  If  they  do,  they 
have  violated  a  Federal  law.  And  so  we  are  working  with  people 
now  and  hope  soon  to  have  more  to  say  about  that. 

Mr.  Sanford.  Mr.  Chairman,  would  I  have  time  for  one  other 

Mr.  McHuGH.  Certainly. 

Mr.  Sanford.  Not  to  be  on  the  commercialization  kick,  as  you 
say,  or  privatization  kick,  I  understand  Australia  privatizes — or  re- 
quires that  they  privatize  their  post  office.  If  so,  how  is  that  work- 
ing? Is  it  working  all  right?  What  have  you  all  heard? 

Mr.  RuNYON.  I  have  heard  some.  I  think  Bill  knows  more  about 
that  subject  than  I  do. 

Mr.  Henderson.  There  are  several  foreign  administrations  that 
are  in  one  stage  or  another  of  privatization.  Most  of  those  are  being 
proposed  by  postal  management.  Graham  John  is  the  Director  Gen- 
eral there,  and  they  are  very  happy  with  their  structure.  New  Zea- 
land is  doing  the  same  thing;  the  United  Kingdom  is  attempting  to 
do  it;  the  Netherlands;  Sweden;  there  are  various  phases  of  that 
going  on,  and  they  range  in  changes.  I  think  only  one  has  given  up 
the  monopoly;  the  rest  of  them  keep  the  monopoly,  and  it  varies  in 
being  able  to  be  more  businesslike,  to  have  more  freedoms.  Most 


of  those  foreign  postal  administrations  have  more  freedoms,  more 
business  freedoms,  than  the  U.S.  Postal  Service  has. 

Mr.  COUGHLIN.  Can  I  add  one  other  thing  there  too  on  the  sub- 
ject of  privatization  versus  corporatization?  Bill  has  described  what 
is  going  on  in  some  foreign  postal  administrations,  and,  frankly, 
the  term  "privatization"  usually  implies  a  change  in  ownership  for 
a  public  institution.  In  most  foreign  postal  systems  they  have,  rath- 
er than  privatized,  gone  to  corporatization,  which  is  a  more  busi- 
ness-free, a  more  liberalized  tyj^  of  environment  in  which  they  can 
operate,  but  they  are  still  owned,  at  least  on  a  majority  basis  if  not 
entirely,  by  the  government  of  their  country.  There  is  a  distinction 
in  those  terms,  and  sometimes  when  we  use  the  term  around  here 
it  gets  kind  of  fuzzy  about  exactly  what  we  are  talking  about. 

Mr.  RUNYON.  Some  of  them  have  also  given  stock  ownership  to 
their  employees,  which  I  think  is  a  pretty  good  solution  because  it 
makes  the  employees  owners,  and  owners  have  a  stronger  look  at 
how  money  is  spent  and  so  forth. 

Mr.  Sanford.  Thank  you. 

Mr.  McHuGH.  Mr.  Shays. 

Mr.  Shays.  I  am  just  going  to  reiterate  a  question  and  put  it 
more  in  a  request.  I  hope  that  it  will  be  the  goal  of  the  post  office 
to  try  to  get  the  mail  out  before  11:30  and  continue  to  move  it  clos- 
er to  that  9  o'clock  figure  so  that  all  Americans  are  getting  their 
mail  a  little  sooner.  And  then  I  just  want  to  follow  up  with  a  few 
other  questions  as  they  relate  to,  first,  labor  issues. 

I  am  struck  by  the  fact  you  are  very  labor  intense.  I  have  met 
some  very  happy  postal  employees,  most  of  them  very  dedicated,  I 
have  met  some  very  angry  postal  employees,  and  they  have  ex- 
traordinary' work  rules  in  some  cases  through  the  collective  bar- 
gaining process  that  preceded  you,  and  they  are  almost  captives  of 
their  own  system.  My  sense  is  that  you  have  about  800  employees 
right  now,  in  that  range. 

Mr.  RuNYON.  800,000. 

Mr.  Shays.  800,000,  and  that  ultimately  you  are  going  to  have 
to  get  that  number  down  to  500,000.  I  mean  with  automation  and 
so  on,  that  is  an  effort.  Is  that  an  effort? 

Mr.  RuNYON.  Well,  the  number  will  drop  with  automation,  but 
how  far  it  drops  depends  on  how  much  more  mail  we  get.  You  see, 
we  have  gotten  9  billion  more  pieces  of  mail,  and  we  have  had  to 
establish  3  million  new  delivery  points,  which  means  we  have  to 
have  new  post  offices,  and  so  as  long  as  we  are  growing  there  will 
be  people  increased. 

Mr.  Shays.  Which  raises  for  me  the  whole  question  of  facilities. 
In  our  area  the  post  office  sometimes  rents  or  leases  facilities  rath- 
er than  owns  them,  and  I  am  struck  by  the  fact  that  you  really 
back  yourself  into  a  very  untenable  situation.  Take  a  suburban 
conununity  where  you  don't  have  a  lot  of  commercial  space.  Once 
your  lease  runs  out,  you  don't  have  many  options  of  places  to  go, 
and  it  seems  to  me  it  becomes  the  seller's  market  and  not  the  buy- 
er's market.  Did  we  waste  a  wonderful  opportunity  during  the  last 
few  years  when  we  went  through  a  crunch  with  real  estate  not  to 
buy  into  some  properties,  and  is  that  one  of  the  unfortunate  as- 
pects of  the  700,000  that  we  will  pay  dearly  for  in  the  years — 700 
million,  rather? 


Mr.  COUGHLIN.  Only  on  a  very  limited  basis,  Congressman.  As  I 
said,  there  are  still  facilities  that  we  have  not  built,  particularly  in 
smaller  communities,  as  a  result  of  that. 

But  the  answer  to  your  question  basically  is  no,  I  don't  think  we 
have  missed  those  opportunities.  We  are  not  generally  in  the  prac- 
tice of  buying  land  or  buying  up  buildings  on  speculation — on  a 
speculative  basis  that  we  might  need  them;  but  if  we  know  there 
is  a  need  there  or  if  we  know  a  lease  is  going  to  expire,  then  we 
are  on  it  right  away. 

Mr.  Shays.  You  have  a  unique  challenge  though  in  suburban 
communities.  I  mean  you  need  your  trucks  out  there,  you  need  that 
kind  of  space,  yet  you  need  your  facilities  in  an  accessible  place.  Is 
it  conceivable  that,  say,  for  suburban  communities  where  you  have 
post  offices  in  each,  that  you  will  combine  with  automation  and  so 
on — that  you  will  combine  the  sorting  into  one  town  and  just  have 
so-called  stores?  Is  that  the  trend? 

Mr.  COUGHLIN.  That  is  very  much  the  basic  operating  concept  of 
the  Postal  Service  and  has  been  for  the  last  20  years. 

Mr.  Shays.  If  that  is  the  trend,  I  hope  that  the  stores — it  is  very 
frustrating  for  people  in  suburban  communities  to  get  those  yellow 
slips  because  they  weren't  there  during  the  day,  and  they  have  got 
to  go  pick  up  their  mail,  and  they  have  got  to  do  it  at  hours  that 
aren't  convenient  for  them. 

Mr.  COUGHLIN.  Yes,  that  is  a  real  challenge. 

Mr.  Shays.  Pardon  me? 

Mr.  COUGHLIN.  Yes.  I  think  very  much  that  is  a  challenge,  and 
we  have  extended,  for  example,  our  window  hours  and  the  avail- 
ability of  some  of  our  retail  facilities,  but  there  is  still  more  to  be 
done  in  that  area  so  that  the  hours  are  more  convenient  for  exactly 
the  kind  of  people  you  are  talking  about. 

Mr.  Shays.  I  could  talk  to  you  guys  all  day,  but 

Mr.  McHuGH.  Does  that  mean  you  are  through? 

Mr.  Shays.  Thank  you. 

Mr.  McHuGH.  Thank  you. 

We  all  could  talk  to  you  all  day.  Of  course  we  have  a  great  deal 
to  discuss,  but  the  hour  is  getting  a  bit  late  in  terms  of  the  legisla- 
tive schedule,  so,  with  that,  we  will  call  this  portion  of  the  sub- 
committee meeting  to  a  close. 

Mr.  Runyon,  thank  you  so  much,  and  Mr.  Coughlin  and  Mr.  Hen- 
derson, for  being  here  this  morning.  We  will  be  returning  after  our 
series  of  hearings  for  a  response,  and  I  am  sure  at  that  time  we 
will  have  other  questions. 

The  question,  as  Mr.  Sanford  said,  quite  often  of  privatization — 
and  whether  it  means  corporatization  or  privatization  depends  on 
whom  you  are  talking  to  at  the  moment — is  one  that  all  of  us  hear 
about  when  we  go  home.  I  have  said  repeatedly  that,  in  my  opin- 
ion, the  burden  of  proof  is  upon  the  shoulders  of  those  who  believe 
that  we  should  put  those  "for  sale"  signs  up  in  the  windows  of 
every  post  office  in  America,  and  I  believe  that.  But,  having  said 
that,  I  do  think  that  those  who  feel  the  current  structure  is  a  meri- 
torious one,  feel  that  it  should  continue  to  have  a  burden  of  proof 
as  well,  and  that  is  to  try  to  establish  the  best  possible  system. 
This  is  why  the  subcommittee  is  here  to  respond  to  your  needs  in- 
asmuch as  we  can,  and  we  have,  I  think,  some  very  laudable  ideas 


on  paper.  What  we  need  to  do  is  work  together  to  try  to  bring  them 
off  the  paper  and  into  hard  proposals,  and  we  are  at  your  disposal 
to  do  that.  I  think  it  is  critically  important  that  this  process  begin 
as  soon  as  possible.  So  we  are  looking  forward  to  seeing  this  done. 

Again,  gentlemen,  thank  you  for  being  here. 

Mr.  RuNYON.  Thank  you,  Mr.  Chairman. 

Miss  Collins  of  Michigan.  Mr.  Chairman. 

Mr.  McHuGH.  Yes,  Miss  CoUins. 

Miss  Collins  of  Michigan.  At  this  point  I  would  hke  to  ask  if 
the  opening  statement  for  the  ranking  minority  member,  Cardiss 
Collins,  could  be  entered  for  the  record. 

Mr.  McHuGH.  Certainly,  without  objection. 

Miss  Collins  of  Michigan.  Thank  you. 

[The  prepared  statement  of  Hon.  Cardiss  Collins  follows:] 

Prepared  Statement  of  Hon.  Cardiss  Collins,  a  Representative  in  Congress 
From  the  State  of  Illinois 

Mr.  Chairman,  today  the  Subcommittee  on  the  Postal  Service  begins  a  series  of 
hearings  designed  to  explore  and  examine  the  overall  operation  and  organization  of 
the  U.S.  Postal  Service.  As  part  of  an  agency  review  we  will  also  focus  on  the  tools 
needed  to  ensure  that  the  Postal  Service  is  better  able  to  be  competitive  and  finan- 
cially stable  in  the  next  century. 

Frankly,  I  remain  concerned  about  the  future  of  the  U.S.  Postal  Service.  We  con- 
tinue to  experience  delays  in  first  class  mail  delivery.  Two  weeks  ago  a  member  of 
my  staff  mailed  a  letter  from  the  Hill  to  an  office  in  downtown  DC.  The  letter  was 
mailed  out  on  Thursday  and  received  downtown  the  following  Wednesday.  We  still 
have  a  long  way  to  go.  Last  September  I  mailed  out  first  class  official  government 
notices  regarding  a  townhall  meeting  scheduled  three  weeks  from  the  date  the 
mailings  were  sent  out.  My  first  class  official  notices  were  received  on  the  near 
North  Side  of  Chicago  afl;er  CHRISTMAS!  No  small  wonder  that  in  the  latest  Cus- 
tomer Satisfaction  Index  survey  just  released,  Chicago  residents  gave  their  mail 
service  a  57%  rating!  And  that's  the  good  news! 

In  Chicago  we  have  been  subjected  to  mail  being  set  ablaze,  found  in  trash  bins, 
marked  return  to  sender  and  stashed  in  apartment  buildings  and  homes — all  on  the 
heels  of  over  a  decade  of  poor  delivery  service.  Getting  back  to  the  basics  of  solid 
and  dependable  mail  delivery  must  be  the  rule,  not  the  exception. 

Mail  volume  and  overtime  is  up.  There  are  more  employees  now  than  when 
downsizing  began  three  years  ago.  We  just  saw  the  price  of  a  postage  stamp  go  from 
29  cents  to  32  cents  and  yet  the  agency  continues  to  lose  millions.  We  have  yet  to 
reaUze  any  return  on  our  investment  in  the  automation  area.  In  the  midst  of  such 
a  dreary  picture,  the  Postmaster  General  is  calling  for  the  deregulation  of  the  U.S. 
Postal  Service.  In  a  nutshell,  he  wants  to  be  able  to  shorten  and  simplify  the  rate 
setting  process,  provide  volume  discounts,  introduce  new  products  in  a  more  timely 
manner  and  replace  the  collective  bargaining  and  grievance  arbitration  process. 

I  want  to  ensure  that  any  solutions  to  the  current  and  ongoing  problems  facing 
the  Postal  Service  are  well  thought  out  and  workable.  We  need  viable  and  construc- 
tive solutions.  In  this  new  era  we  cannot  afford  another  restructvuing  debacle  where 
we  witnessed  a  total  breakdown  of  mail  delivery,  an  increase  in  violence  in  the 
workplace,  inspection  stings  of  innocent  postal  workers  and  in  general,  chaos.  Solu- 
tions must  work! 

I  have  met  with  Postmaster  General  Runyon  and  wish  to  work  with  him  to 
achieve  the  best  we  have  to  offer  by  way  of  the  Postal  Service.  And  I  look  forward 
to  working  with  my  colleagues  in  crafting  the  tools  necessary  to  ensure  the  mail 
moves  in  an  efficient  and  timely  manner.  Thank  you. 

Mr.  McHuGH.  For  the  benefit  of  the  subcommittee  members, 
without  objection,  we  will  be  submitting  questions  to  the  Post- 
master and  his  staff  in  writing,  and  we  will  anticipate  their  re- 
sponses. So  if  you  would  forward  those  to  us,  we  will  add  them  to 
the  list  and  do  our  best  to  see  that  some  information  is  provided 
in  return. 


The  next  portion  of  our  panel  is  Mr.  Michael  Motley,  who  is  Asso- 
ciate Director  of  the  Government  Business  Operations  Issues,  Gen- 
eral Government  Division  of  the  U.S.  General  Accounting  Office, 
and  he  is  joined  by  Mr.  Campbell,  whom  I  will  defer  to  Mr.  Motley 
for  introductions. 

Mr.  Motley,  if  you  were  here  at  the  beginning  of  the  previous 
panel,  you  know  that  it  is  full  committee  policy  to  swear  in  all  wit- 
nesses. So  if  you  two  gentlemen  would  rise  and  raise  your  right 

[Witnesses  sworn.] 

Miss  Collins  of  Michigan.  Mr.  Chairman. 

Mr.  McHuGH.  Yes,  Miss  Collins. 

Miss  Collins  of  Michigan.  I  would  like  to  state  for  the  record 
that  Congressmen  Major  Owens  and  Gene  Green  are  in  welfare  re- 
form committee  markups  and  that  is  why  they  are  not  here,  and 
if,  without  objection,  their  statements  can  be  entered  for  the  record. 

Mr.  McHuGH.  Certainly,  without  objection. 

We  understand  that  the  new  rules  of  the  House,  doing  away  with 
proxy  voting,  have  put  enormous  pressure  on  the  Members,  and  we 
understand  their  not  being  here  in  person,  and  we  would  be  happy 
to  accommodate  them.  i 

Thank  you. 

[The  prepared  statement  of  Hon.  Gene  Green  follows:] 

Prepared  Statement  of  Hon.  Gene  Green,  a  Representative  in  Congress 
From  the  State  of  Texas 

Thank  you,  Mr.  Chairman,  for  calling  this  important  hearing.  The  Postal  Service 
is  the  arm  of  government  that  the  public  comes  into  contact  with  the  most.  The  Post 
Office's  policy  of  universal  service  is  something  the  American  people  have  taken  for 
granted  for  generations.  Therefore,  combining  familiarity  with  high  expectations, 
the  Post  Office  often  comes  up  short  in  the  estimation  of  its  customers.  This  impres- 
sion is  not  always  merited,  but  there  are  too  many  instances  of  Post  Office  SNAFU's 
to  be  accepted  as  just  poor  public  relations. 

Some  are  arguing  for  full  privitization  of  the  Postal  Service.  The  attractiveness 
of  the  proposal  originates  with  the  American  preference  for  efficient,  profit-driven 
enterprises.  That,  indeed,  has  merit.  But  we  have  to  answer  whether  rural  cus- 
tomers will  have  to  pay  more  for  first-class  mail  just  because  it  is  inconvenient  to 
reach  them  and  whether,  philosophically,  that  is  the  direction  in  which  we  want  the 
Postal  Service  to  move.  Do  we  want  anyone  other  than  the  Postal  Service  to  have 
access  to  our  mailboxes?  These  simple  questions  will  have  to  be  addressed  in  any 
discussion  on  privitization. 

There  are  several  other  issues  to  be  addressed  as  well,  including  further  automa- 
tion, labor  negotiations,  and  cutting  unnecessary  regulations.  I  look  forward  to  hear- 
ing the  thoughts  of  the  Postmaster  General  on  these  issues  and  I  welcome  him  to 
this  hearing. 

Mr.  McHuGH.  With  that,  we  will  turn  the  floor  over  to  Mr.  Mot- 
ley for  his  opening  statement. 


Mr.  Motley.  Thank  you,  Mr.  Chairman. 

Mr.  Chairman,  Miss  Collins,  we  are  pleased  to  be  here,  other 
members  of  the  subcommittee,  to  participate  in  the  subcommittee's 
oversight  hearings  on  the  U.S.  Postal  Service.  First  let  me  intro- 


duce  Jim  Campbell  to  my  right  who  is  an  Assistant  Director  in  the 
General  Accounting  Office  and  responsible  for  our  audit  activities 
at  the  post  office. 

Our  testimony  today  will  focus  on  an  overview  of  the  key  charac- 
teristics of  the  Postal  Service  of  today  and  challenges  that  will  face 
the  Service  and  Congress  as  they  consider  how  mail  service  will  be 
provided  in  the  future. 

I  would  like  to  ask,  Mr.  Chairman,  that  my  full  statement  be 
provided  in  the  record,  and  I  will  certainly  summarize. 

Mr.  McHuGH.  Without  objection. 

Mr.  Motley.  OK.  I  think  it  is  important,  Mr.  Chairman,  that  we 
recognize  very  briefly,  even  though  Mr.  Runyon  covered  some  of 
these  things,  that  we  are  talking  about  an  organization  that  has 
850,000-plus  people;  we  are  talking  about  one  that  has  changed 
substantially  since  the  1970  Act  when  it  was  turned  into  the  U.S. 
Postal  Service;  we  are  talking  about  one  that  processes  about  177 
billion  pieces  of  mail  a  year,  as  contrasted  to  87  billion  pieces  of 
mail  in  1971,  and  has  a  revenue  of  approximately  $50  billion  a 
year;  in  1971  we  were  talking  about  $6.3  billion.  We  are  talking 
about  a  very,  very  large  organization. 

There  is  much  discussion  and  speculation  about  the  inroads  into 
the  Postal  Service's  business  caused  by  electronic  communication 
adtematives  such  as  fax  and  e-mail.  However,  Postal  Service  data 
show  that  mail  volume  is  still  growing.  Volume  was  up  4.7  percent 
in  the  first  quarter  of  1995  compared  with  the  year  before.  Less 
than  5  percent  of  the  mail  today  is  personal  correspondence  be- 
tween households.  The  rest  is  either  between  households  and  busi- 
nesses or  between  businesses  themselves. 

Mr.  Chairman,  before  I  begin  to  discuss  the  challenges  facing  the 
Postal  Services  and  some  of  our  related  work,  I  believe  it  is  impor- 
tant to  remind  ourselves  that  the  1970  Act  required  the  Postal 
Service  to  provide  universal  mail  service  at  uniform  prices  that  are 
fair  and  reasonable.  To  help  accomplish  this,  the  Service  was  given 
the  exclusive  right  to  deliver  letter  mail  and  exclusive  access  to 
mail  boxes.  The  right  to  deliver  letter  mail  was  given  in  a  set  of 
laws  originally  enacted  in  1792  called  the  Private  Express  Statutes. 
However,  advances  in  communication  technology,  competition  from 
the  private  sector,  and  the  possible  enactment  of  legislation  affect- 
ing the  Service's  monopoly  over  letter  mail  could  affect  the  size, 
structure,  and  overall  mission  envisioned  by  the  1970  Act,  many  of 
the  things  that  you  all  have  been  talking  about  today. 

Increasingly,  the  private  sector  companies  and  new  technology 
are  supplanting  traditional  mail  services.  We  have  reported  on  how 
the  Postal  Service  lost  most  of  the  markets  in  overnight  delivery 
and  parcels  to  the  private  sector  several  years  ago.  Major  losses  of 
Postal  Service  business  could  trigger  more  frequent  and  larger 
postage  increases  and  could  lead  to  further  reductions  in  the  Serv- 
ice's business.  Most  of  our  work  in  recent  years  has  relevance  to 
current  postal  issues  and  significance  to  the  Service,  the  public, 
and  the  Congress.  I  will  briefly  mention  a  few  of  those  issues. 

The  first  is  postal  labor-management  relations.  Last  year  we  re- 
ported that  poor  labor-management  relations  persist  because  of  an 
autocratic  management  style,  adversarial  employee  and  union  atti- 
tudes, inadequate  performance  management  systems,  and  the  na- 


ture  of  the  work.  Four  of  the  six  contract  negotiations  since  1978 
have  required  that  a  third  party  intervene  to  settle  major  dif- 
ferences. Current  talks  have  been  stalled  by  disputes  and  impasses 
since  November  1994,  and,  as  Mr.  Runyon  indicated,  things  are 
still  going  slow. 

In  our  report  we  recommended  that  the  parties  develop — and 
those  parties  would  be  the  leadership  in  the  Postal  Service  as  well 
as  the  unions  and  management  associations — a  long-term  agree- 
ment on  approaches  to  remedy  this  labor-management  climate.  In 
November  1994,  as  Mr.  Runyon  indicated,  he  called  for  the  prin- 
cipal parties  to  participate  in  a  summit  to  address  the  issues  in  the 
report.  Management  associations  agreed,  but  the  major  unions  de- 
clined to  participate  until  the  current  contract  talks  have  been 
completed.  In  view  of  these  difficulties,  this  subcommittee  could 
help  by  monitoring  the  progress  of  the  parties  and  requesting  peri- 
odic progress  reports  on  developing  and  implementing  a  framework 

Regarding  customer  service,  the  Postal  Service  knows  it  is  below 
postal  standards  and  falls  short  of  customer  expectations.  Alto- 
gether, our  work  in  the  customer  service  area  indicates  that  the 
Service  faces  a  difficult  and  lengthy  task  in  changing  its  processes 
and  improving  service  to  expected  levels. 

Now,  Mr.  Chairman,  I  would  like,  if  you  could  just  turn  very 
briefly  to  the  chart  that  is  the  last  chart  in  the  testimony  under 
the  figures — it  is  figure  5 — and  basically  this  shows  that  nationally 
service  and  customer  satisfaction  have  remained  about  the  same 
during  the  last  several  years.  The  results  are  published  quarterly. 
In  the  first  quarter  of  1995,  85  percent  of  households  across  the 
Nation  rated  overall  services  good  to  excellent,  and  84  percent  of 
the  first-class  letters  arrived  on  time.  This  is  the  same  rating  re- 
ported for  overall  service  3  years  earlier  and  1  percent  point  in- 
crease on  on-time  delivery  from  3  years  ago.  The  Service's  goal  for 
on-time  performance  is  95  percent.  There  is  no  specific  numerical 
for  customer  service. 

I  bring  this  up  because  the  Postal  Service  has  a  long  way  to  go, 
Mr.  Chairman,  in  trjdng  to  reach  the  goals  that  it  is  trying  to  set 
out  not  only  for  customer  service  but  some  of  the  things  that  I  be- 
lieve have  been  addressed  by  the  subcommittee  members  already 
in  on-time  delivery. 

In  an  increasingly  competitive  environment,  customer  service  has 
become  more  critical  to  the  survival  and  success  of  both  public  and 
private  entities.  Therefore,  this  subcommittee  may  wish  to  more 
fully  understand  how  well  the  Postal  Service  is  meeting  the  needs 
of  its  customers  by  requesting  information  about  both  residential 
and  business  customer  satisfaction  levels. 

I  would  like  to  make  a  few  comments  about  automation.  Automa- 
tion has  been  a  key  Postal  Service  strategy  for  reducing  cost 
growth  and  maintaining  reasonable  postage  rates.  The  Service  is 
continuing  a  $5  billion,  16-year  effort  to  bar  code  virtually  all  let- 
ters and  sort  them  automatically  into  deliver  sequence.  This  week 
we  reported  that  automating  mail  processing  and  achieving  savings 
has  been  more  difficult  to  accomplish  than  anticipated.  The  Service 
has  not  been  able  to  achieve  the  personnel  reductions  that  were 
once  projected,  and  financial  savings  have  been  small  relative  to 


total  operating  costs.  We  believe  it  is  important  for  the  oversight 
committees  to  fully  understand  the  total  cost  and  benefits  of  major 
postal  initiatives  such  as  automation  in  terms  of  savings  efficiency 
and  service,  and  they  may  want  to  request  specific  data  on  parts 
of  the  automation  program  as  it  progresses. 

Finally,  Mr.  Chairman,  the  growing  pressure  of  competition  for 
the  Postal  Service.  Service  delivery  problems  together  with  persist- 
ent labor-management  relations  problems  and  other  challenges 
have  increased  the  calls  for  basic  reforms  of  the  Postal  Service.  Re- 
cent developments  include  proposed  legislation  to  turn  the  Postal 
Service  into  a  publicly  owned  corporation,  and  a  coalition  recently 
asked  the  Postmaster  General  to  initiate  action  to  suspend  letter 
mail  monopoly  over  the  third-class  advertising  mail.  I  understand 
he  has  just  declined  to  consider  that  proposal. 

The  PMG  just  testified  that  the  Postal  Service  should  be  given 
more  operational  flexibility  in  several  areas  to  improve  the  postal 
system.  Fundamental  issues  that  surround  the  emerging  debate  on 
the  future  of  the  Postal  Service  include  how  competition  will  affect 
the  Postal  Service,  revenue  costs  and  rates,  and  ultimately  the  Fed- 
eral Government's  role  in  mail  and  merchandising  delivery;  the  pri- 
vate sector's  capacity  to  effectively  assume  responsibility  for  mail 
service  in  this  country;  and  three,  the  impact  on  the  economy  and 
the  people  of  this  country  of  such  a  change. 

In  summary,  Mr.  Chairman,  the  Postal  Service  affects  virtually 
every  person  and  business  in  this  country.  Major  changes  to  the 
Postal  Service  could  have  an  impact  on  the  quality,  price,  and 
availability  of  mail  service  and  could  also  affect  the  work  of  more 
than  850,000  employees.  In  that  context,  the  Congress  needs  com- 
prehensive and  accurate  information  on  postal  operations  in  order 
to  be  able  to  carefully  consider  what  changes  should  be  made  to  im- 
prove this  important  service. 

This  concludes  my  prepared  statement,  Mr.  Chairman,  and  we 
look  forward  to  our  continued  working  relationship  with  the  sub- 
committee, and  Mr.  Campbell  and  I  would  be  happy  to  take  any 
questions  that  you  may  have. 

[The  prepared  statement  of  Mr.  Motley  follows:] 

Prepared  Statement  of  Michael  E.  Motley,  Associate  Director,  Government 
Business  Operations  Issues,  General  Government  Division,  U.S.  General 
Accounting  Office 

summary  of  the  statement 

GAO's  testimony  highlights  key  characteristics  of  the  Postal  Service  of  today  and 
the  challenges  that  will  face  both  the  Service  and  the  Congress  as  they  consider  how 
mail  service  will  be  provided  in  the  future. 

In  1994  GAO  reported  that  poor  labor-management  relations  persist.  Foxir  of  the 
six  contract  negotiations  since  1978  have  required  that  a  third  party  intervene  to 
settle  major  differences.  If  this  climate  does  not  improve.  Congress  may  need  to  re- 
consider any  provisions  of  the  1970  act  that  may  inhibit  the  parties'  reaching  agree- 

Nationally,  service  and  customer  satisfaction  indicators  have  remained  about  the 
same  during  the  past  several  years.  The  Postal  Service  has  fallen  below  postal 
standards  and  short  of  customer  expectations.  GAO's  work  suggests  that  the  Postal 
Service  faces  a  difficult  and  lengthy  task  of  changing  Postal  processes  and  improv- 
ing service  to  expected  levels. 

Similarly,  the  Service  is  facing  additional  challenges  in  revenue  protection,  auto- 
mation, and  competition.  In  1994  GAO  reported  that  postage  meter  revenue,  which 
comprised  almost  half  of  the  total  service  revenues,  was  at  a  high  risk  for  fraud  be- 


cause  of  weaknesses  in  program  contiols.  Many  of  the  weaknesses  identified  by  the 
Postal  Inspection  Service  had  continued  for  many  years.  Also,  this  week  GAO  re- 
ported that  the  Postal  Service's  automation  program,  now  a  $5  billion  16  year  pro- 
gram, is  haying  problems  achieving  savings  and  producing  less  than  expected.  In 
addition,  while  overall  mail  volume  is  continuing  to  increase,  private  sector  compa- 
nies and  new  technology  are  supplanting  some  traditional  mail  services. 

Service  delivery  problems  and  other  challenges  have  increased  the  calls  for  basic 
reforms  of  the  Postal  Service.  Recent  developments  include  legislation  to  turn  the 
Postal  Service  into  a  publicly-owned  corporation,  and  a  coalition  request  to  the  Post- 
master General  to  suspend  the  letter  mail  monopoly  over  third  class  advertising 
mail.  The  Postal  Service  has  suggested  that  it  be  given  more  operational  flexibility 
in  several  areas.  Fundamental  issues  about  the  future  of  the  Postal  Service  include 
(1)  how  competition  will  affect  Postal  revenue,  cost,  and  rates  and  the  federal  gov- 
ernment's role  in  mail  dehvery;  (2)  the  private  sector's  capacity  to  effectively  assume 
responsibiUty  for  mail  service  in  this  country;  and  (3)  the  impact  on  the  economy 
and  the  people  of  this  country  of  such  a  change. 

Mr.  Chairman  and  Members  of  the  Subcommittee:  We  are  pleased  to  be  here 
today  to  participate  in  the  Subcommittee's  oversight  hearings  on  the  U.S.  Postal 
Service.  My  testimony  will  focus  on  ( 1)  an  overview  of  the  key  characteristics  of  the 
Postal  Service  of  today,  and  (2)  challenges  that  will  face  the  Service  and  Congress 
as  they  consider  how  mail  service  vnll  be  provided  in  the  United  States  in  the  fii- 
ture.  My  testimony  is  based  on  work  we  have  completed  or  have  underway  on  Postal 
labor  management  relation,  customer  service,  postal  revenues,  automation,  and  com- 


Under  the  reforms  instituted  by  the  Postal  Reorganization  Act  of  1970,  the  Postal 
Service  is  to  provide  mail  service  to  people  and  organizations  using  revenue  gen- 
erated from  postage.  Postage  rates  are  adjusted  periodically  to  keep  the  Service  on 
a  break-even  basis  financially.  The  size  and  scope  of  Postal  Service  operations  are 
massive — nearly  40,000  post  offices,  stations,  and  branches;  over  $16  billion  in- 
vested in  buildings,  equipment,  and  land;  the  nation's  largest  civilian  employer  with 
over  850,000  employees;  a  payroll  of  over  $100  million  a  day;  and  177  biUion  pieces 
of  mail  deUvered  in  1994  with  revenues  of  $50.3  bilUon.  In  1971  the  Postal  Service 
had  revenues  of  $6.3  billion,  delivered  87  billion  pieces  of  mail,  and  had  729,000  em- 
ployees. The  Service  currently  delivers  in  about  a  week  the  same  number  of  pieces 
that  United  Parcel  Service  and  Federal  Express  combined  delivered  in  all  of  1994. 

The  majority  of  the  Postal  workforce  is  composed  of  four  crafts — postal  clerks,  city 
carriers,  rural  carriers,  and  mail  handlers — whose  working  conditions  and  pay  and 
benefits  are  determined  through  collective  bargaining.  (See  fig.  1.)  The  average  an- 
nual pay  of  bargaining  employees  is  about  $36,000,  including  overtime. 

Figure  1.  Number  of  Postal  Employees  by  Type,  January  1995 

Type  Number 

Special  delivery  messengers  1519 

Vehicle  operations  and  maintenance 12^252 

Maintenance  36!526 

Rural  carriers 44^171 

Mail  handlers 55,039 

Non-bargaining 83'695 

Non-career  112!547 

City  carriers  1..Z"".  232464 

Clerks  263.402 

Source;  Postal  Services  On-Rolls  and  Paid  Statistics  Report 

There  is  much  discussion  and  speculation  today  about  the  inroads  into  the  Postal 
Service's  business  caused  by  electronic  communication  alternatives  such  as  fax  and 
e-mail.  While  these  are  a  growing  phenomena,  Postal  Service  data  show  that  mail 
volume  is  also  still  growing.  (See  fig.  2.)  Volume  was  up  4.7  percent  in  the  first 
quarter  of  1995  compared  with  the  year  before.  Less  than  5  percent  of  the  mail 
today  is  personal  correspondence  between  households.  The  rest  is  either  between 
households  and  businesses  (65  percent)  or  between  businesses  themselves  (30  per- 
cent). (See  fig.  3.)  Most  of  the  business  mail  received  by  households  is  generated  by 
the  government,  the  financial  services  sector,  and  retail  sales.  The  Postal  Service 


FIGURE  2:   Total  Mail  Volume.  1971  to  1994 

Billions  of  pieces 






80  -H — I — I — I — f 

717273747576777879808182838485868788  89  9091929394 

Source:  Postal  Service  Annual  Reports 


determined  that  in  1992  the  average  household  received  about  21  pieces  of  mail  a 
week,  and  over  half  of  this  volume  was  advertising.  (See  fig.  4.) 

Figure  3.  Origin  and  Destination  of  Mail,  1992 


Federal  Government  to  home  1.2 

Home  to  home  4.2 

Home  to  business 6.3 

Business  to  business  30.2 

Business  to  home 58.1 

Source:  Postal  Service  Household  Diary  study,  May  1994 

Figure  4.  Content  of  Household  Mail,  1992 


Federal  Government 1.9 

Newspapers 2.1 

Magazines  4.8 

Statements 4.5 

Nonprofit  6.1 

Personal  6.4 

Bills 14.0 

Other  14.9 

Advertising  51.7 

Totals  more  than  100  percent  because  First-Class  mall  with  advertising  enclosures  are  counted  twice. 
Source:  Postal  Sen/Ice  Household  Diaiy  Study.  May  1994. 


The  1970  Act  required  the  Postal  Service  to  provide  universal  mail  service  at  uni- 
form prices  that  are  fair  and  reasonable,  as  well  as  to  provide  its  employees  with 
wages,  benefits,  and  working  conditions  comparable  to  those  of  the  private  sector. 
To  help  accompUsh  this,  the  Service  was  given  the  exclusive  right  to  deUver  letter 
mail  and  exclusive  access  to  mail  boxes. 

The  Postal  Service  expects  that  during  the  next  few  years  overall  mail  volume  will 
continue  to  grow.  However,  advances  in  communication  technology,  competition 
from  the  private  sector  and  the  possible  enactment  of  legislation  affecting  the  Serv- 
ice's monopoly  over  letter  mail  could  affect  the  size,  structiire,  and  overall  mission 
envisioned  by  the  Postal  Reorganization  Act  of  1970.  Increasingly,  private  sector 
companies  and  new  technology  are  supplanting  traditional  mail  services.  We  have 
reported  ^  on  how  the  Postal  Service  lost  most  of  the  markets  in  overnight  delivery 
and  parcels  to  the  private  sector  several  years  ago.  The  statutory  monopoly  on  letter 
mail,  provided  for  in  the  Private  Express  Statutes,  has  not  stopped  the  development 
of  alternative  means  of  communications  and  delivery,  and  many  mailers  are  actively 
seeking  out  these  sources.  Major  losses  of  Postal  Service  business  could  trigger  more 
frequent  and  larger  postage  increases,  and  could  lead  to  further  reductions  in  the 
Service's  business. 

Most  of  our  work  in  recent  years  can  be  divided  into  five  broad  categories,  each 
having  relevance  to  current  postal  issues  and  significance  to  the  Service,  the  public, 
or  the  Congress:  (1)  labor/management  relations,  (2)  customer  service,  (3)  protecting 
postal  revenues,  (4)  automation,  and  (5)  the  Service's  future  role  and  competition. 
I  will  briefly  mention  our  major  findings  as  well  as  some  of  our  ongoing  work  on 
these  issues. 


The  1970  Act  responded  to  the  controversy  in  the  1960s  over  a  Post  Office  Depart- 
ment that  was  hampered  by  deteriorating  facilities,  poor  working  conditions,  and 
worker  walkouts  over  wages.  Last  year  we  reported  ^  that  poor  labor-management 

lU.S.  Postal  Service:  Pricing  Postal  Services  in  a  Competitive  Environment  (GAO/GGD-92- 
49,  Mar.  25,  1992). 

2  U.S.  Postal  Service:  Labor-Management  Problems  Persist  on  the  Workroom  Floor  (GAO/ 
GGD-94-201A  &  201B.  Sept.  29,  1994). 


relations  persist  because  of  an  autocratic  management  style,  adversarial  employee 
and  union  attitudes,  inadequate  performance  management  systems,  and  the  nature 
of  the  work.  Postal  management,  the  four  major  unions,  and  the  three  management 
associations  have  been  unable  to  resolve  their  differences  effectively.  Four  of  the  six 
contract  negotiations  since  1978  have  required  that  a  third  party  intervene  to  settle 
major  differences. 

In  our  September  1994  report,  we  recommended  that  the  parties  develop  a  long- 
term  agreement  on  approaches  to  remedy  this  labor-management  climate.  We  also 
recommended  that  the  parties  report  to  Congress  in  1  year  on  their  progress  in 
reaching  a  basic  framework  agreement.  In  a  November  1994  response,  the  Post- 
master General  called  for  the  principal  parties  to  participate  in  a  summit  to  address 
the  issues  in  the  report.  Management  associations  agreed,  but  the  major  unions  de- 
clined to  participate  at  least  until  after  current  contract  talks  are  completed.  Cur- 
rent talks  have  been  stalled  by  disputes  and  impasses  since  November  1994. 

In  view  of  these  difficulties,  this  Subcommittee  could  help  by  monitoring  the 
progress  of  the  parties  in  developing  and  implementing  a  framework  agreement  and 
requesting  periodic  progress  reports  from  all  parties.  Further,  if  the  parties  involved 
cannot  reach  a  framework  agreement,  within  a  reasonable  time,  Congress  may  want 
to  reexamine  whether  there  are  any  aspects  of  the  employee  and  management  rela- 
tionships with  the  Postal  Service  that  are  prescribed  in  the  1970  act  but  constitute 
barriers  to  reaching  a  framework  agreement. 


The  Postal  Service  knows  that  its  service  to  customers  is  below  postal  standards 
and  falls  short  of  customer  expectations.  Our  work  in  this  area  has  covered  a  variety 
of  topics  including  the  consolidation  of  mail  processing  in  rural  areas  that  had  ad- 
versely affected  service,  the  acceptance  of  credit  cards  in  post  offices  for  greater  cus- 
tomer convenience,  the  need  to  upgrade  postal  retail  stores  to  make  them  more  at- 
tractive to  customers,  and  the  Service's  inability  to  deliver  priority  mail  in  2  days. 
We  will  soon  be  issuing  reports  on  the  use  of  the  Service's  periodic  residential  cus- 
tomer satisfaction  surveys  and  the  causes  of  last  year's  deterioration  in  delivery 
service  in  the  Washington  D.C.,  metropolitan  area.  Altogether,  our  work  in  the  cus- 
tomer service  area  indicates  that  the  Service  faces  a  difficult,  and  lengthy  task  in 
changing  its  processes  and  improving  service  to  expected  levels. 

Nationally,  service  and  customer  satisfaction  have  remained  about  the  same  dur- 
ing the  past  several  years.  (See  fig.  5.)  The  Service  hires  contractors  to  determine 
the  time  it  takes  for  First-Class  letters  to  move  from  a  collection  box  to  the  point 
of  delivery,  and  solicits  opinions  from  households  on  various  aspects  of  residential 
service.  The  results  are  published  quarterly.  In  the  first  quarter  of  1995,  85  percent 
of  households  across  the  nation  rated  overall  service  as  good  to  excellent,  and  84 
percent  of  the  First-Class  letters  arrived  on  time.  This  is  the  same  rating  reported 
for  overall  service  3  years  earlier,  and  1  percentage  point  increase  in  on  time  deliv- 
ery from  3  years  ago.  The  Service's  goal  for  on-time  performance  is  95  percent. 
There  is  no  specific  numeric  goal  for  customer  service. 

In  an  increasingly  competitive  environment,  customer  service  has  become  more 
critical  to  the  survival  and  success  of  both  public  and  private  entities.  Therefore, 
this  Subcommittee  may  wish  to  more  fully  understand  how  well  the  Postal  Service 
is  meeting  the  needs  of  its  customers.  To  do  so,  it  could  request  additional  informa- 
tion about  both  residential  and  business  customer's  satisfaction  levels  on  both  a  na- 
tional basis  as  well  as  different  areas  of  the  country.  Data  are  available  on  residen- 
tial customers,  but  not  much  of  it  is  routinely  shared  with  Congress.  Data  on  busi- 
ness customer  satisfaction  has  been  collected  by  the  Postal  Service  contractor  since 
spring  1994,  but  the  results  have  not  yet  been  made  available. 


Because  of  a  complex  rate  structure  and  huge  volumes  of  mail,  the  Service  faces 
a  difficvilt  challenge  in  making  pure  that  the  correct  amount  of  postage  is  paid  by 
customers.  In  1993,  postage  meters  accounted  for  about  $21  billion,  or  46  percent, 
of  postage  revenue.  Because  of  weaknesses  in  the  controls  over  metered  mail,  the 
Postal  Inspection  Service  has  documented  fraud  in  the  mail  industry  since  1985, 
which  has  involved  substantial  revenue  losses  to  the  Service.  In  1994,  we  reported 
that  many  of  the  same  problems  the  Inspection  Service  found  had  continued  over 


FIGURE  5:   Percent  of  Customers  Rating  Overall  Service  as  Good  to 
Excellent  and  Percent  of  Overnight  Mail  Delivered  on  Time 



4-90       2-91       4-91 

2-92       4-92       2-93       4-93 
Quarer  and  fiscal  year 

2-94       4-94 

-  -  Customer  satisfaction  —  On  time  delivery 

Postal  Service's  External  Flrst-Class  Measurement  System 
(EXFC)  and  Customer  Satisfaction  Index  (CSI). 


many  years,  and  that  the  Postal  Service  had  initiated  actions  to  correct  many  long- 
standing deficiencies  to  reduce  the  risk  of  fraud  in  the  future. 

Currently  we  are  reviewing  the  controls  over  revenue  at  business  mail  acceptance 
units.  Nationally,  there  are  about  500  such  units  that  accept  mail  from  the  largest 
mailers  and  are  responsible  for  ensuring  that  postage  paid,  totaling  about  $20  bil- 
lion in  1994  from  these  units  is  the  correct  amount. 

While  the  Postal  Service  has  initiated  several  actions  to  address  meter  problems, 
it  has  historically  focused  limited  attention  on  controls  over  revenue.  With  costs  and 
rates  increasing,  the  Subcommittee  may  wish  to  focus  attention  on  the  adequacy  of 
the  Postal  Service's  efforts  to  reduce  the  risk  of  meter  fraud  as  well  as  maintain 
effective  internal  controls  over  other  revenues. 


A  key  Postal  Service  strategy  for  reducing  cost  growth  and  maintaining  reason- 
able postage  rates  has  been  its  reliance  on  automation  to  process  mail  more  effi- 
ciently. The  Service  is  continuing  a  $5  billion,  16  year  effort  to  barcode  virtually  all 
letters  and  sort  them  automatically  into  deUvery  sequence.  This  week  we  reported 
that  automating  mail  processing  and  achieving  savings  have  been  more  difficult  to 
accomplish  than  anticipated.  The  obstacles  range  from  equipment  not  having  as 
much  capabihty  as  expected  to  management  being  unable  to  gain  employee  coopera- 
tion in  changing  work  methods  affected  by  automation.  The  Service  has  not  been 
able  to  achieve  the  personnel  reductions  that  were  once  projected,  and  any  financial 
savings  have  been  small  relative  to  total  operating  costs. 

Our  latest  work  on  automation  showed  that  hmited  data  are  available  to  specifi- 
cally show  the  benefits  being  achieved  for  the  investment  in  automation.  We  believe 
it  is  important  for  the  oversight  committees  to  fully  understand  the  total  cost  and 
benefits  of  major  postal  initiatives  such  as  automation  in  terms  of  savings,  effi- 
ciency, and  service.  The  Postal  Service  is  expanding  its  use  of  remote  barcoding  sys- 
tems and  is  replacing  contract  employees  with  postal  employees.  It  would  be  useful 
for  future  comparisons  and  decisionmaking  for  the  Postal  Service  to  report  to  the 
Subcommittee  cost  and  productivity  data  on  the  sites  that  have  been  operated  by 
private  contractors  so  such  data  can  be  compared  with  similar  data  for  those  sites 
operated  with  postal  employees. 


Service  deUvery  problems,  together  with  persistent  labor  management  relations 
problems  and  other  challenges,  have  increased  the  calls  for  basic  reforms  of  the 
Postal  Service.  Recent  developments  include  the  following: 

Legislation  has  been  introduced  to  turn  the  Postal  Service  into  a  pubUcly- 
owned  corporation  and  suspend  the  Private  Express  Statutes  5  years  later. 

A  coaUtion  of  advertising  mailers  and  private  mail  carrier  competitors  have 
asked  the  Postmaster  General  to  initiate  action  to  suspend  the  letter  mail  mo- 
nopoly over  third  class  advertising  mail. 

The  Postal  Service  has  suggested  that  it  be  given  more  operational  flexibility  in 
several  areas  to  improve  the  postal  system.  These  areas  include  collective  bargain- 
ing, cross  crafting,  grievances,  pay  for  performance,  workforce  management,  rate 
setting,  and  new  products. 

The  Postal  Service  is  also  actively  engaged  in  research  to  offer  nontraditional 
services,  particularly  electronic  communications.  Some  efforts  that  are  being  tested 
or  considered  are  participation  in  the  Time  Warner  Cable  interactive  television  test 
project  in  Orlando,  Florida;  development  of  an  electronic  postmark  capability  to 
safeguard  the  privacy  of  electronic  mail;  and  combination  electronic/hard  copy  deliv- 
ery. The  Service  has  tried  similar  tjT)es  of  initiatives  in  the  past  with  varjang  de- 
grees of  success. 

Fundamental  issues  that  surround  the  emerging  debate  on  the  future  of  the  Post- 
al Service  include  (1)  how  competition  will  affect  the  Postal  Service's  revenue,  cost, 
and  rates  and  ultimately  the  federal  government's  role  in  mail  and  merchandise  de- 
livery; (2)  the  private  sector's  capacity  to  effectively  assume  responsibiUty  for  mail 
service  in  this  country;  and  (3)  the  impact  on  the  economy  and  the  people  of  this 
country  of  such  a  change.  Because  of  the  interest  in  postal  reform,  we  are  currently 
examining  aspects  of  these  issues  and  expect  to  finished  around  the  end  of  1995. 

In  summary,  Mr.  Chairman,  the  Postal  Service  affects  virtually  every  person  and 
business  in  this  country.  And,  as  I  pointed  out  early  in  my  statement,  major 
changes  to  the  Postal  Service  could  have  an  impact  on  the  quality,  price,  and  avail- 
abihty  of  mail  service,  and  could  also  affect  the  work  of  more  than  850,000  employ- 
ees. In  that  context,  Congress  needs  comprehensive  and  accurate  information  on 


postal  operations  in  order  to  be  able  to  carefully  consider  what  changes  should  be 
made  to  improve  this  important  service. 

This  concludes  my  prepared  statement.  I  have  attached  a  list  of  our  Postal  Service 
products  issued  since  1990.  I  would  be  happy  to  respond  to  any  of  your  questions. 

Response  to  Written  Questions  Submitted  by  Hon.  Bob  Ehrlich  to  Michael 

E.  Motley 

Question  1   In  your  testimony,  you  raise  the  issue  of  postal  sites  with  contracted 

.  employees  When  will  the  data  concerning  these  sites  be  released,  and  what  is  the 

general  attitude  of  these  sites  compared  to  those  sites  employing  postal  workers'? 

Answer.  The  use  of  contracted  employees  as  discussed  in  my  testimony  refers  to 
remote  barcodmg  of  mail.  This  entaUs  making  an  electronic  image  of  letters  that 
optical  character  readers  cannot  read.  The  images  are  electronically  transmitted  to 
data  entry  clerks  who  enter  enough  address  information  to  provide  the  appropriate 
dehveiy  point  code.  The  Postal  Service  initially  planned  that  remote  bardode  keying 
would  be  contracted  out.  However,  in  November  1993,  the  Postal  Service  and  the 
American  Postal  Workers  Union  agreed  that  the  work  would  be  done  by  postal  em- 
ployees. Because  postal  employees  are  paid  more  than  contract  workers,  the  agree- 
ment could  reduce  the  savings  anticipated  from  remote  barcoding.  We  are  in  the 
process  of  gathenng  data  to  compare  the  cost  of  contracting  out  verses  the  cost  of 
doing  this  work  with  postal  employees.  This  work  is  being  done  at  the  request  of 
the  Lhamnan  of  the  House  Appropriations  Subcommittee  on  Treasury,  Postal  Serv- 
ice and  General  Government.  We  will  provide  the  Government  Reform  and  Over- 
sight Subcommittee  on  the  Postal  Service  a  copy  of  the  results  of  our  work  when 
It  IS  available.  Currently,  we  do  not  have  any  data  about  the  attitudes  of  the  em- 
ployees at  either  the  contracted  out  or  postal  service  locations 

Question  2.  What  are  the  reasons  that  the  expectations  on  automation  are  not 
being  reahzed?  What  can  this  committee  do  to  fulfill  these  expectations'? 

Answer.  The  reasons  beliind  the  Postal  Service's  inability  to  fully  realize  its  expec- 
tations tor  automation  are  numerous.  Many  of  the  reasons  are  described  in  GAO's 
report  issued  on  February  22,  1995  entitled  Postal  Service:  Automation  Is  Taking 
Longer  and  Producing  Less  Than  Expected  (GAO/GGD-95-89BR).  Some  of  the  rea- 
sons include  the  following. 

postage  rates  are  out  of  sync  with  the  Postal  Service's  automation  plans  be- 
cause   incentives    offered    to    mailers    give    preference    to    presorting    over 

the  Service's  optical  character  readers  (OCR)  did  not  read  and  barcode  as 
much  mail  as  expected  because  of  the  wide  variation  in  the  physical  characteris- 
tics of  envelopes  and  addresses. 

the  delayed  deployment  of  the  Remote  Barcoding  System  (RBCS)  that  oc-  ' 
curred  when  plans  to  use  contract  employees  for  remote  barcoding  were  thwart- 
ed by  a  umon-management  contract  dispute. 

the  Service  has  not  reduced  carrier  in-office  workhours  or  adjusted  routes  as 
intended  because  there  has  not  been  a  sufficient  quantity  of  dehvery  sequenced 

a  1989  goal  of  an  outright  reduction  of  over  40,000  workyears  to  result  from 
automation  has  not  happened  because  of  the  barcoding  and  sorting  problems 
mentioned  above  and  the  Service's  inability  to  change  work  methods  and  reduce 
employee  workhours  after  automation  equipment  was  deployed 
Ihis  Committee  can  help  in  fulfilHng  these  expectations  through  its  oversight  role 
ot  the  Fosta   Service.  Continued  oversight  of  major  postal  initiatives  such  as  auto- 
mation should  encourage  more  consistent  postal  management  attention  to  such  criti- 
cally important  issues  and  hopefully  result  in  more  consistent  fulfillment  of  its  stat- 
ed goals. 

Question  3.  Does  the  Postal  Rate  Commission  need  to  be  reformed?  If  so  can  it 
work  in  a  more  expeditious  manner? 

Aiiswer  We  believe  that  the  postal  ratemaking  process  is  in  need  of  reform  to  re- 
tlect  the  changing  competitive  environment  in  which  the  Postal  Service  operates  We 
will  be  providing  under  separate  correspondence  our  views  on  the  postal  ratemaking 
M^ltuh  \^^!  correspondence  is  being  prepared  in  response  to  the  Subcommittee's 
March  /,  1995  inquiry  about  recommendations  contained  in  our  March  1992  report 
to  the  Congress  on  postal  pricing.  (U.S.  Postal  Service:  Pricing  Postal  Services  in 
a  Competitive  Environment,  GAO/GGD-92-49,  March  25,  1992.) 

Mr.  McHuGH.  Thank  you  very  much,  Mr.  Motley. 


You  have  heard  in  the  testimony  and  the  questioning  today  from 
some  of  the  subcommittee  members,  and  I'm  sure  privatization  is 
a  topic  of  great  discussion  virtually  anywhere  the  issue  of  the  Post- 
al Service  comes  up.  For  the  purposes  of  this  question  we  are  talk- 
ing about  total  divestiture  of  public  involvement,  Government  in- 
volvement in  the  Postal  Service,  and  turning  it  over  to  a  private 

firm.  1       .         r.  .• 

I  know  that  GAO  has  been  doing  some  evaluation  of  an  entire 
range  of  those  kinds  of  proposed  changes  and  looking  as  well  at  the 
experiences  of  other  countries  such  as  mentioned  by  Mr.  Sanford. 
Can  you  share  with  us  some  of  your  preliminary  observations  on 
those  analyses? 

Mr.  Motley.  Well,  the  analysis  that  we  are  doing  with  regard  to 
what  you  would  term  the  privatization  or  the  competition  type 
issue,  Mr.  Chairman,  is  currently  under  way,  and  we  are  looking 
at  various  segments  of  it.  Some  of  the  results  of  that  have  not  been 
solidified  at  this  point  in  time.  However,  we  do  hope  to  have  that 
information  available  by  the  end  of  this  year. 

As  you  have  suggested,  and  as  many  others  have  suggested  here, 
this  is  a  very  complex  area,  but  I  might  suggest  that  all  the  talk 
that  we  have  had  here  with  regard  to  the  1970  Act,  one  of  the 
things  that  we  need  to  keep  in  mind  is  that  that  act  was  set  up 
to  ensure  fair  and  equitable  service  to  everybody,  and  that  should 
be  the  bottom  line  starting  point  for  many,  not  just  those  on  this 
subcommittee,  but  the  people  at  the  Postal  Service  and  around  the 
country  to  consider  when  we  are  suggesting  making  changes. 

I  hope  our  work  will  be  able  to  demonstrate  to  some  extent  the 
kind  of  changes  that  might  impact  on  the  Postal  Service  if  certain 
segments  of  the  Postal  Service  were  to  go  away  as  a  result  of  com- 
petition or  as  a  result  of  either  commercialization  or  privatization. 

With  regard  to  the  information  regarding  countries,  we  are  just 
in  the  process  of  visiting  some  of  the  countries  to  more  fully  under- 
stand the  details  of  how  they  have  gone  about  privatizing  or  com- 
mercializing or,  as  Mr.  Coughlin  suggested,  more  corporation  type 
organization.  As  we  understand  it,  most  of  those  countries  also  had 
a  mail  monopoly  and  most  of  them  have  held  on  to  it  to  some  ex- 
tent, and  so  I  think  that  might  be  very  important  in  our  analysis 
as  well  and  we  would  be  happy  to  share  those  results,  when  they 
are  available,  with  the  subcommittee. 

Mr.  McHuGH.  I  assume  the  studies  will  also  look  at,  if  it  exists, 
where  changes  and  a  diminution  of  postal  involvement  in  certain 
areas  might  be  of  benefit.  However,  I  am  not  saying  it  would  be. 
Mr.  Motley.  We  are  hoping,  but  some  of  these  things  aren't  ab- 
solute, Mr.  Chairman,  as  you  might  suspect.  Some  of  these  will 
have  to  be  run  on  the  scenarios  that  could  take  place.  I  believe  the 
information  that  will  be  developed  probably  wouldn't  have  a  bottom 
line  that  would  say,  you  ought  to  do  this,  but  would  certainly  lend 
information  to  the  debate  to  consider  when  changes  are  being 
Mr.  McHuGH.  All  right.  Thank  you. 

I  know  Miss  Collins,  as  many  of  us  do,  has  another  appointment, 
so  I  would  like  to  yield  to  her  at  this  time. 
Miss  Collins  of  Michigan.  Thank  you,  Mr.  Chairman. 


I  find  it  interesting  that  you  are  visiting  other  countries  to  see 
if  they  are  going  into  privatization  or  retaining  a  monopoly.  I  won- 
der, do  you  also  visit  other  countries  to  see  what  kind  of  coopera- 
tion we  could  have  in  mail  delivery,  especially  Third  World  coun- 
tries, where  it  takes  3  to  4  weeks  for  mail  delivery? 

Mr.  Motley.  Some  recent  work  that  we  have  been  doing,  Miss 
Collins,  deals  with  the  international  marketplace,  if  you  will,  and 
we  have  had  numerous  discussions  with  the  Postal  Service  '  And 
some  of  our  work  will  include  the  kind  of  agreements  that  the  Post- 
al Service  is  attempting  to  work  out  with  a  whole  variety  of  coun- 
tries that  are  involved  in  coordinating  mail  systems  to  ensure  both 
proper  accounting  for  that  mail  and  revenues  and  expenses  and 
whatever,  and  to  ensure  that  there  is  proper  communication  among 
those  countries. 

Miss  Collins  of  Michigan.  Do  we  have  to  pay  other  countries 
to  dehver  our  mail?  Our  stamps,  that  is  our  revenue,  but  what  is 
the  cost  to  them?  Could  that  be  a  consideration  in  why  they  are 
so  slow  delivering  our  mail? 

,,^r-  Motley.  It  gets  to  be  a  very  complex  thing.  Miss  Collins 
Maybe  Mr.  Campbell  could  address  it. 

Mr  Campbell.  The  short  answer  is  yes,  we  do  pay  other  coun- 
tries for  the  delivery  of  U.S.  mail  in  country,  and  they  in  turn  reim- 
burse the  U.S.  Postal  Service  for  incoming  delivery.  The  rates  and 
so  on  are  worked  out  through  the  Universal  Postal  Union,  which 
includes  about  180-plus  member  nations,  as  well  as  through  bilat- 
eral agreements  that  have  been  made  by  the  U.S.  Postal  Service 
and  certain  other  countries  such  as  Canada,  but  there's  reimburse- 
ments on  both  ends  for  in-country  delivery,  yes. 
Miss  Collins  of  Michigan.  Thank  you. 

Mr.  Motley,  please  explain  the  results  of  your  investigation  into 
the  racial  agenda  investigations  of  the  Postal  Inspection  Service 
narcotics  information  investigations. 

Mr.  Motley.  Well,  as  you  know.  Miss  ColHns,  we  issued  that  re- 
port a  while  back,  and  it  showed  a  distribution  of  the  racial  mix 
as  you  well  know,  of  the  investigations  that  were  done  by  the  Post- 
al Inspection  Service.  Many  of  these  things  were  highlighted  I 
guess,  as  Mr.  Runyon  alluded  to,  by  the  sting  that  went  awry.  As 
a  result  I  believe,  of  our  work  and  as  a  result  of  some  of  the  failed 
things  that  have  taken  place  there,  the  Postal  Service  has  made  a 
fair  number  of  changes  with  regard  to  their  investigations  with  re- 
gard to  paid  informants.  That  work  also  suggested  that  these  in- 
vestigations were  across  a  very  broad  range  of  locations  throughout 
the  country.  It  was  more  factual  in  nature  in  providing  the  kind 
of  data  that  the  Postal  Service  had  with  regard  to  the  investiga- 
tions that  were  done  into  illicit  drugs,  use  of  drugs  in  the  Postal 

Miss  Collins  of  Michigan.  And  finally,  GAO  has  consistently 
round  that  Postal  Service  automation  is  not  producing  the  savings 
originally  projected.  Is  that  still  true  today?  Has  that  performance 
improved?  Do  you  know  what  steps  the  U.S.  Postal  Service  is  tak- 
ing to  improve  the  performance  of  its  multi-billion  dollar  automa- 
tion program? 

Mr.  Motley.  As  you  well  know.  Miss  Collins,  we  have  reported 
on  that  on  numerous  occasions  and  I  think  testified  before  you  and 


said  they  didn't  meet  their  goal  this  year,  and  they  didn't  meet  the 
^oal  last  year  even  though  they  have  made  some  little  pieces  ot 
progress  over  time.  j  .  i       u  • 

The  report  that  we  released  yesterday  to  you  and  the  chairman 
and  to  the  Senate  Governmental  Affairs  Subcommittee  on  Post  Of- 
fice and  Civil  Service  highlights  a  variety  of  the  problems  that  the 
Postal  Service  has  been  having  in  not  only  bar  coding  the  mail  but 
being  able  to  read  it  through  the  optical  character  readers.  I  think 
it  was  Mr.  Henderson  who  said  that  this  has  been  a  big  problem 
area  they  haven't  had  the  technological  advances  there,  and,  in  ad- 
dition, the  savings,  especially  with  regard  to  the  work  force  have 
been  very  difficult  to  recognize.  The  Postal  Service  may  meet  addi- 
tional challenges  in  this  area  because  of  some  of  the  changes  they 
have  recently  made  with  regard  to  hiring  more  permanent  employ- 
ees and  less  transitional  employees  whom  they  could  move  out  ot 
certain  areas  of  the  Postal  Service  as  automation  started  to  take 


Miss  Collins  of  Michigan.  Also,  we  are  losing  so  much  money 
in  the  metered  mail  fraud.  I  spoke  with  Mr.  Runyon,  I  think  last 
week  or  the  week  before  last,  and  he  says  that  they  are  really  get- 
ting up  to  speed  on  the  new  machines  coming  in,  but  have  you  seen 

Mr.  Motley.  Well,  we  are  hearing  those  kinds  of  things,  and  it 
is  our  intention  to  revisit  that  work. 

As  you  know,  last  year  we  issued  a  report  dealing  with  meter 
mail  fraud.  Part  of  that  report  basically  highlighted  some  of  the 
problems  that  existed  for  years  and  years  at  the  Postal  Service  that 
the  Postal  Inspection  Service  had  identified.  One  of  the  things  that 
got  us  involved  in  that  issue  was  Mr.  Runyon's  statement  that  he 
felt  as  though  maybe  the  Postal  Service  was  losing  about  $100  mil- 

^  We  are  talking  about  1.4  milUon  meters  out  there,  and  if  I  recall 
the  numbers  correctly,  about  600,000  of  those  were  subject  to  some 
kind  of  tampering  that  could  defraud  the  Postal  Service  from  reve- 
nues We  understand  that  some  of  the  major  meter  manufacturers 
have  taken  some  major  strides  since  that  report  was  issued  to  try 
and  make  improvements  in  their  meters,  and  there  are  plans  as 
well  to  cancel  out  some  of  those  meters  that  were  currently  active. 
I  don't  believe  all  of  that  has  taken  place  at  this  point  in  time. 

Miss  Collins  of  Michigan.  Thank  you. 

Mr.  Motley.  Certainly. 

Thank  you.  Miss  Collins. 

Mr.  McHuGH.  Thank  you,  Miss  Collins. 

Mr.  Sanford.  ,  „        ,., -i-^    u  -a.u 

Mr  Sanford.  I  think  I  am  going  to  lose  all  credibility  here  with 
this  next  question  in  that  I  had  some  questions  here  relating  actu- 
ally to  the  letter  mail  monopoly,  but  I  just  stepped  out  for  2  sec- 
onds to  meet  a  constituent  from  Myrtle  Beach,  from  my  home  dis- 
trict, who— small  world— works  for  UPS,  and  he  said  he  had  been 
listening  to  the  testimony  and  said,  "Well,  you  know  we  have  got 
303  000  employees.  We  had  revenues  of  $19.5  billion  last  year.  We 
are  one  of  the  largest  employers  of  Teamsters  in  the  world  in  terms 
of  union  constraints,  and  yet  we  made  $800  million  last  year. 


Again,  and  I  don't  mean  to  be  on  this  privatization  kick,  but 
what  would  be  your  response  to  somebody  like  that  that  says  we 
worked  under  similar — many  similar  constraints  and  yet  we  ended 
up  making  $800  million?  How  did  they  do  it? 

Mr.  Campbell.  Let  me  just,  if  I  may,  take  one  quick  answer  to 
that,  give  you  one  quick  answer,  and  I'm  sure  Mike  can  add  some- 
thing as  well. 

I  recently  calculated  the  revenue  per  piece  of  mail  for  the  UPS 
as  well  as  the  U.S.  Postal  Service,  and  it  came  to  about  $6  for  UPS 
per  piece  of  mail  and  it  was  28  cents  per  piece  of  mail  for  the 
USPS — Postal  Service.  Now  what  that  indicated  to  me  is  that  they 
are  in  a  very  different  kind  of  business.  They  are  certainly  charging 
very  different  prices  per  piece  of  mail.  So  that  when  you  talk  about 
the  total  revenue  received,  it  is— for  the  UPS— very  substantial. 

Mr.  Sanford.  You  are  in  the  information  business. 

Mr.  Campbell.  Yes,  in  terms  of  revenue.  But  they  are  not  deliv- 
ering anywhere  near  the  numbers  of  pieces  of  mail.  I  mean  it  is 
a  very  different  kind  of  business. 

Mr.  Sanford.  What  do  you  think  though  about— again,  I  stepped 
out — about  the  letter  mail?  Necessary  or  unnecessary? 

Mr.  Motley.  Well,  I  think  it  would  be  a  little  bit  difficult  to  say, 
gee,  it's  not  necessary,  let's  do  something.  I  think  we  are  talking 
about  something  that  was  started  back  in  1792,  and  it  was  created 
for  a  reason,  and  one  of  those  reasons  that  I  think  we  need  to  keep 
in  mind  is,  it  was  to  keep  the  Postal  Service  as  a  viable  financial 
entity.  In  other  words,  it  recognized  that  the  carriage  of  mail  was 
going  to  be  costlier  in  some  locations  than  it  was  going  to  be  in  oth- 
ers, and  one  was  going  to  balance  the  other  off,  and  I  think  in 
terms  of  looking  at  the  1970  Act,  looking  at  the  mail  monopoly,  you 
have  to  consider  those  things. 

There  have  been  some  inroads  to  the  mail  monopoly,  as  sug- 
gested in  my  testimony,  in  some  areas.  One  was  overnight  express 
mail.  In  1971  the  Postal  Service  had  100  percent  of  the  market, 
today  in  the  express  mail  area  they  have  about  12  percent  of  the 
market,  and  so  we  have  to  be  careful  with  things  as  we  consider 
change.  As  suggested  in  my  testimony  as  well,  Mr.  Runyon  turned 
down  the  coalition  suggestion  for  some  inroads  into  the  main  mo- 
nopoly. I  think  those  things  have  to  be  considered  very  carefully. 
Some  may  be  very  appropriate  and  be  good;  others  I  think  we  need 
to  be  careful  with  in  order  that  we  don't  erode  the  kind  of  balance 
that  was  initially  intended,  and  if  the  Congress  wants  to  keep  that 
kind  of  balance  then  that  is  one  of  the  things  they  need  to  consider. 

Mr.  Sanford.  I  have  no  further  questions,  Mr.  Chairman. 

Mr.  McHuGH.  Thank  you,  Mr.  Sanford. 

Revisiting  the  issue  that  Miss  Collins  brought  up  on  automation, 
I  don't  think  there  is  any  question,  when  the  Postmaster  General 
made  his  statement,  he  and  the  other  members  suggested  they 
have  some  technical  problems  for  which  they  would  assume  respon- 
sibility. However,  in  one  of  the  direct  questions  I  believe  posed  by 
Mr.  Shays,  the  Postmaster  seemed  to  suggest  that  the  reason  they 
haven't  seen  a  greater  drawdown  in  the  number  of  personnel  is  be- 
cause of  what  we  characterized  as  the  enormously  substantial  in- 
crease in  the  volume  of  mail.  Therefore,  this  could  suggest  that  the 
automation  program  isn't  quite  as  behind  the  curve  as  may  at  first 


appear  What  is  your  perspective  on  that?  Is  that  part  of  the  mix, 
or  do  we  have  a  real  problem  on  the  automation  side  of  the  equa- 

^  Mr  Motley.  I  think  it  is  part  of  the  mix.  I  think  the  volume  of 
mail  has  created  some  of  the  problems.  However,  some  of  the  prob- 
lems again,  alluded  to  by  Mr.  Henderson,  were  the  remote  bar  cod- 
ing sites.  There  is  a  significant  problem  there.  There  were  over— 
and  maybe  Jim  can  help  me  out  here— I  believe  186  of  those  loca- 
tions that  were  supposed  to  be  in  place  to  process  approximately 
30  billion  pieces  of  mail,  and  we  ended  up  with  25  of  those  loca- 
tions in  place  that  process  significantly  less  than  that,  I  think 
about  6  billion  pieces  of  mail. 

The  technology  that  was  available  to  read  the  mail  created  a 
problem  as  well.  While  I  think  some  of  the  problem  was  attributed 
to  volume,  we  need  to  keep  in  mind  that  the  optical  character  read- 
ers today  are  only  reading  about  half  of  the  mail  that  goes  through 
those  optical  character  readers.  That  means  it  has  to  be  processed 
some  other  way,  and  that  other  way  is  a  more  expensive  way. 

With  regard  to  the  work  force— and  I  alluded  to  it  very  shortly, 
but  in  1989  we  made  a  definite  move  to  hire  transitional  employees 
who  could  be  replaced  by  automation  actually  and  the  Postal  Serv- 
ice could  let  them  go.  In  other  words,  we  could  have  had  a  reduc- 
tion in  the  total  work  force  of  the  Postal  Service.  There  has  been 
a  change  in  that  philosophy  in  the  last  year  or  so  where  transi- 
tional employees  now,  some  are  being  moved  into  permanent  posi- 
tions, but  more  permanent  employees  are  being  hired. 

So  while  we  saw  a  dip  in  the  early  nineties  in  the  total  work 
force,  we  are  basically  back  up  to  the  total  work  force  where  we 
were'  when  some  of  the  greater  emphasis  was  put  on  automation 

in  1988.  .        ^ .      u-  u  ^ 

Mr  McHUGH.  Is  the  automation  a  question  of  too  high  expecta- 
tions, and  just  when  you  get  to  put  it  on  the  ground  and  operating 
it  we  learn  that,  beyond  anyone's  reasonable  ability  to  project,  it 
didn't  function  as  we  had  hoped,  or  is  it  a  problem  of  not  pursuing 

it  in  the  correct  way?  ^    „    ,  t  ^.u-   i    •^. 

Mr.  Motley.  I  think  it  is  a  combination  of  all  three,  i  tmnK  it 
is  a  combination  of  having  greater  expectations  than  we  ended  up 
with.  One  part  of  that  is  technology. 

Mr.  McHuGH.  Excuse  me,  but  were  those  expectations  reason- 
able  at  the  time? 

Mr  Motley.  It  would  be  difficult  for  me  to  suggest  that  they 
were  reasonable.  Maybe  Mr.  Campbell  has  a  different  view  on  that. 

Mr  Campbell.  I  think  they  probably  were  considered  by  the 
Postal  Service  to  be  reasonable  at  the  time,  and  we  didn't  make 
any  determination  at  that  time. 

Our  report  basically  looked  at  what  was  claimed  to  have  been 
and  would  be  the  results  of  the  automation  program  versus  what 
has  actually  occurred,  and  there  is  quite  a  gap  there,  as  we  pointed 

I  think  we  should  emphasize  that  we  are  not  opposed  to  automa- 
tion. We  don't  think  there  is  anything  inherently  wrong  with  auto- 
mation, and  it  surely  has  made  a  difference  in  the  processing  of  the 
177  billion  pieces  of  mail.  There  are  numerous  problems  in  the  pro- 


gram,  including  management  of  the  program,  lots  of  obstacles,  and 
they  still  have  a  long  way  to  go,  years  left  to  go. 

In  terms  of  why  it  has  not  reduced  the  work  force,  the  work 
force,  as  we  point  out,  has  not  been  impacted;  it  has  grown  with 
volume,  and  the  real  difficulty  is  that  no  one  knows  what  impact 
automation  has  had  on  productivity. 

A  lot  of  the  gains  that  have  been  made  could  be  related  to 
presorting  of  mail.  The  mail  comes  in  already  to  be  delivered  in  ef- 
fect, so  it  is  hard  to  isolate  the  impact  of  automation  on  the  work 
force  or  productivity  or  efficiency. 

Mr.  McHuGH.  Yes.  I  want  to  make  it  clear  for  the  record,  I  am 
not  opposed  to  or  have  objections  to  automation  either.  What  I  am 
trying  to  help  myself  understand,  as  I  talk  to  various  parties  of  in- 
terest in  this  whole  question,  is  that  those  who  are  claiming  this 
has  been  a  total  failure  of  management  and,  on  the  other  hand, 
those  who  are  saying  that  the  failure  to  see  a  drawdown  in  person- 
nel levels — and  in  fact  we  have  seen  that  we  have  come  back  up 
to  pre-downsizing  levels— suggest  that  the  Postal  Service,  from  a 
management  perspective,  lost  an  enormously  opportune  moment  to 
effect  that,  and  that  was  the  intent,  and  they  blew  it.  I  don't  know 
what  the  answer  is,  but  this  is  really  the  line  of  reasoning  or  ques- 
tioning that  I  have. 

I  would  like  to  interrupt  my  questions  right  now  and  acknowl- 
edge the  arrival  of  the  gentleman  from  Maryland,  Mr.  Ehrlich. 

I  don't  know  if  you  would  like  to  make  a  statement  for  the 

Mr.  Ehrlich.  I  will  submit  a  statement  for  the  record,  Mr. 
Chairman,  but  I  am  catching  up  with  my  aide  right  now. 

Mr.  McHuGH.  I  understand,  you  can  submit  it,  without  objection. 

Mr.  Ehrlich.  Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  We  will  come  back  to  you. 

Mr.  Motley. 

Mr.  Motley.  Mr.  Chairman,  if  I  could  just  summarize,  I  see 
three  things.  We  talked  about  expectations;  that's  one.  They  were 
probably  a  little  high.  We  talked  about  management.  In  1992  man- 
agement was  changed  significantly,  and  a  lot  of  the  emphasis  in 
the  automation  area  changed.  As  was  inferred  by  Mr.  Runyon,  they 
are  trying  to  get  that  back  up  to  speed  again.  I  agree  with  you,  we 
lost  some  momentum  there.  We  lost  an  opportunity  to  keep  that 
ball  rolling.  And  I  think  the  other  thing  is  the  employees  them- 

So  we  have — when  I  say  the  employees,  what  I  am  saying  is,  I 
won't  say  there  is  a  resistance  to  this  automation,  but  it  is  some- 
thing new  and  we  are  having  difficulty  getting  them  into  it.  There's 
a  lot  of  people,  according  to  the  Postal  Service  Employee  Opinion 
Survey,  that  don't  think  this  management — or  that  the  manage- 
ment of  the  automation  program  has  been  run  very  well.  A  lot  of 
times  there  is  not  much  buy-in. 

Mr.  McHuGH.  Yes.  Thank  you  for  that  clarification. 

In  1990  there  was  a  big  brouhaha  about  the  allocation  of  costs 
for  the  rate  increase,  the  29  cent  stamp,  and  at  that  time  GAO,  as 
I  recall,  suggested  that  there  be  some  changes  to  the  9-point  rate- 
setting  criteria.  For  example,  it  was  recommended  that  demand 
pricing,  which  considers  the  value  of  service  to  the  sender,  be  given 


greater  weight  in  these  criteria.  However,  there  was  virtually  no 
Iction  taken  at  that  time.  Does  the  GAO  still  feel  that  this  is  a 
problem  of  concern,  and  are  those  recommendations  made  still 
valid,  or  would  they  rather  change  those  today?  ,    ^^  ,  , 

Mr  Motley.  I  think  in  light  of  a  lot  of  the  comments  that  have 
been  made  here  today  about  the  kind  of  things  that  the  Rate  Com- 
mission could  do  or  should  do,  we  need  to  revisit  some  of  those 
matters.  Whether  demand  pricing  should  be  at  the  top  ot  that  list 
today  or  not  is  in  question  in  my  mind,  and  while  we  made  those 
recommendations  back  then,  I  think  we  might  be  deahng  with 
some  different  situations  today.  I  think  we  need  to  look  at  that  cri- 
teria but  we  need  to  look  at  it  very  carefully.        ^  ,    ,^    ,,  ,,  , 

Mr  McHuGH.  Could  we  make  a  request  on  behalf  of  the  sub- 
committee that  perhaps  that  revisitation  occur?  Obviously  that 
would  be  enormously  helpful.  » ,     ^,    .  u 

Mr.  Motley.  We  would  be  happy  to  do  that,  Mr.  Chairman,  abso- 

Mr.  McHuGH.  Thank  you  very  much. 

Let  me  ask  you  a  question  about  the  future  and  the  intent  ot  au- 
tomation, on  which  we  are  having  a  great  deal  of  discussion.  The 
PMG  spoke  about  it— with  respect  to  e-mail  and  faxes  and  the  po- 
tential erosion  of  postal  customers  through  those  new  technologies. 
I  think  I  have  the  sense  that  the  postmaster  and  the  Postal  Service 
in  general  sees  itself  having  a  role  in  those  future  technologies. 
Has  GAO  had  an  opportunity  to  think  about  that?  Do  you  even  be- 
lieve that  this  is  something  the  Postal  Service  should  involve  itself 
in,  or  should  it  confine  itself  to  the  more  traditional  delivery  of  the 

Mr  Motley.  A  difficult  question,  Mr.  Chairman,  I  mean  to  make 
at  this  point  in  time.  Last  year  we  testified  before  the  House  Post 
Office  and  Civil  Service  Committee  regarding  technology  m  the 
Postal  Service.  We  suggested  that  there  is  a  possibility  of  a  large 
erosion  in  the  mail  stream  as  a  result  of  changes  m  technology,  and 
Mr  Runyon  suggested  that  over  the  past  5  years  there  has  been 
approximately  a  35  percent  erosion  of  the  mail  volume  as  a  result 
of  technology  changes  and  more  will  take  place  in  the  future.  1 
think  it  is  really  one  of  the  things  that  not  only  this  subcommittee 
but  the  Postal  Service  should  sit  down  and  discuss  very  thoroughly 
before  decisions  are  made  to  have  the  Postal  Service  go  off  on  dif- 
ferent routes.  ,,  ,     ,     ,  .         ^  ^,    ^  u 

Mr.  McHuGH.  Well,  we  certainly  will  be  looking  at  that  because 
it  is  obviously  a  very  vital  question  as  to  what  the  future  of  the 
Postal  Service  might  be,  and  if  you  get  into  that  area  it  again  puts 
into  question  the  issues  involving  privatization  and  the  Postal 
Service  competing,  et  cetera.  So  we  will  be  looking  to  work  with 
you  on  that  as  well.  ,^    ^  ,    ^     ^i. 

We  do  have  a  vote  that  has  been  called  on  a  rule  for  the  regu- 
latory moratorium  bill.  I  would  be  happy  to  come  back  if  Mr.  Ehr- 
lich  has  a  desire  to  submit  questions.  Otherwise,  due  to  the  hour 
we  could  submit  questions  in  writing  for  the  record,  and  I  assume 
that  Mr.  Motley  and  GAO  would  graciously  respond. 

Mr.  Motley.  We  would  be  happy  to,  Mr.  Chairman. 

Mr.  Ehrlich.  I  appreciate  that,  Mr.  Chairman,  particularly  in 
view  of  my  involvement  with  H.R.  450. 


Mr.  McHuGH.  Yes.  Well,  you  have  business  on  the  floor.  Then  I 
am  going  to  make  an  executive  decision  that  we  will  end  this  and 
go  vote,  and  to  both  of  you  gentlemen,  thank  you  for  being  here 
today.  We  will  submit  those  written  questions,  and,  with  that,  I 
will  adjourn  the  subcommittee  until  Thursday,  March  2,  when  we 
will  hear  from  the  members  of  the  Postal  Rate  Commission. 

Thank  you  all. 

[Whereupon,  at  12:08  p.m.,  the  subcommittee  was  adjourned.] 



THURSDAY,  MARCH  2,  1995 

House  of  Representatives, 
Subcommittee  on  the  Postal  Service, 
Committee  on  Government  Reform  and  Oversight, 

Washington,  DC. 

The  subcommittee  met,  pursuant  to  notice,  at  9:30  a.m.,  in  room 
2247,  Rayburn  House  Office  Building,  Hon.  John  M.  McHugh 
(chairman  of  the  subcommittee)  presiding. 

Present:  Representatives  Sanford,  Oilman,  Mcintosh,  Clinger, 
Owens,  Green,  Collins,  and  Meek. 

Staff  present:  Dan  Blair,  staff  director;  Robert  Taub,  Steve  Wil- 
liams, Heea  Fales,  and  Jane  Hatcherson,  professional  staff  mem- 
bers; Meryl  Cooper,  clerk;  and  Denise  Wilson,  minority  professional 

Mr.  McHuGH.  We'll  call  the  meeting  to  order  and  bid  everyone 
good  morning.  Let  me  begin  by  saying  that  the  number  of  empty 
seats  here  at  the  dais  in  no  way  reflects  on  the  importance  of  this 
particular  hearing,  nor  does  it,  I  think,  diminish  the  critical  nature 
of  the  issues  before  us. 

Let  me  begin  by  welcoming  our  panel  members  here  today.  We 
do  appreciate  your  joining  with  us.  This  is  the  second  oversight 
hearing  to  be  held  by  the  Subcommittee  on  the  Postal  Service.  And 
our  panel  today  will  be  comprised,  as  you  and  the  audience  can  see, 
of  five  members  of  the  Postal  Rate  Commission. 

I  want  to  extend  to  Chairman  Gleiman  and  the  other  members 
of  the  commission  our  welcome  and  appreciation  for  their  attend- 
ance here  this  morning. 

Last  week,  the  subcommittee  began  its  series  of  hearings  when 
the  Postmaster  General  and  the  General  Accounting  Office  ap- 
peared in  a  two-part  session.  In  his  testimony  at  that  time.  Post- 
master General  Runyon  called  for  increased  flexibility  in  the  rate- 
making  process. 

In  an  earlier  speech  before  the  National  Press  Club  in  January, 
Mr.  Runyon  observed  that  it  takes  less  time  to  bring  a  child  into 
the  world  than  it  does  to  proceed  with  a  new  rate  case.  Of  particu- 
lar interest  was  the  suggestion  by  Mr,  Runyon  to  permit  expedited 
consideration  of  any  proposed  rate  increase,  should  such  an  action 
fall  under  the  current  rate  of  inflation. 

Mr.  Runyon  stated  that  preliminary  discussions  had  begun  with 
the  Postal  Rate  Commission  over  this  issue.  And  I  hope  the  chair- 
man might  be  in  a  position  today  to  elaborate  on  those  discussions 



This  past  December,  the  Postal  Rate  Commission  completed  a 
significant  rate  case  in  which  first  class  rates  were  increased  by  al- 
most 9  percent,  while  second,  third,  and  fourth-class  rates  were  in- 
creased by  an  average  of  14  percent. 

And  certainly,  the  subcommittee  would  be  interested  in  learning 
from  Mr.  Gleiman  and  the  other  commissioners  the  rationale,  the 
basis  of  that  increase,  and  their  views  on  whether  this  amount  will 
be  sufficient  to  cover  postal  costs  into  the  future  and,  if  so,  for  how 

In  addition,  the  subcommittee  is  most  interested  today  in  your 
views  concerning  any  proposed  reclassification  case.  As  the  admin- 
istrative body  charged  with  hearing  such  proposals,  the  commission 
would  attract  certainly  considerable  attention,  should  any  reclassi- 
fication case  arise  during  the  upcoming  year. 

And  I  look  forward  to  Chairman  Gleiman  explaining  the  commis- 
sion's roles  in  the  reclassification  process  and  report  to  us  the  effect 
any  reclassification  might  subsequently  have  on  postal  rates.  In 
light  of  the  recent  rate  increase,  Mr.  Chairman,  I  know  you  share 
my  and  the  other  members  of  the  subcommittee's  concerns  regard- 
ing the  maintenance  of  affordable  rates  for  all  postal  customers, 
while  at  the  same  time  attempting  to  balance  the  statutory  direc- 
tive that  revenues  cover  costs  in  the  Postal  Service. 

As  all  of  you  gentlemen  know  full  well,  these  are  challenging 
times  for  the  Federal  Government  and  for  the  Postal  Service.  It  is, 
at  least  in  my  opinion,  our  collective  obligation  to  work  together  in 
an  attempt  to  pursue  our  mutual  goal  of  developing  and  effectively 
implementing  those  policies  that  will  provide  the  citizens  of  this 
Nation  and  the  patrons  of  the  Postal  Service  the  most  efficient  and 
productive  system  possible. 

And  toward  that  end,  it  is  the  intent  of  this  subcommittee  to 
work  with  you  and  all  other  interested  parties.  And  again,  I  want 
to  thank  you  and  the  other  members  of  the  commission  for  being 
here  today.  I  look  forward  to  your  testimony. 

With  that,  let  me  now  yield  to  the  gentleman  from  New  York, 
Major  Owens,  a  member  of  the  subcommittee  representing  the  mi- 
nority here  today. 

Mr.  Owens.  Thank  you,  Mr.  Chairman.  I,  too,  consider  these  to 
be  very  important  hearings.  And  I  certainly  plan  to  stay  for  the  en- 
tirety of  the  hearing.  But  there  has  been  a  change  in  the  schedule 
of  the  subcommittee  on  which  I  serve  as  a  ranking  member,  and 
there's  a  markup  at  10:30. 

Unfortunately,  I'll  have  to  leave,  but  I  will  try  to  return,  because 
I  think  this  is  a  very  important  subject.  And  I  yield  the  balance  of 
my  time  so  that  we  can  commence  with  the  hearing. 

Mr.  McHuGH.  I  thank  the  gentleman  for  that.  And,  as  I  trust  ev- 
eryone understands  and  recognizes,  the  problem  of  scheduling  is  af- 
fecting all  Members.  We're  confident  that  regardless  of  who  is  with 
us  today  at  any  particular  moment,  we'll  have  a  productive  meeting 
and  opportunity  to  put  some  good  comments  on  to  the  record. 

We  have  been  joined  by  the  chairman  of  the  full  committee,  the 
gentleman  from  Pennsylvania,  Mr.  Clinger.  If  he  would  like  to 
make  any  remarks  before  we  begin. 


Mr.  Clinger.  Thank  you,  Mr.  Chairman.  I  have  no  remarks.  I'm 
just  delighted  you're  holding  this  hearing  and  look  forward  to  hear- 
ing the  testimony. 

Mr.  McHuGH.  I  appreciate  the  chairman  being  here  very  much. 
We're  honored  by  his  presence. 

As  has  been  directed  to  all  of  the  subcommittees  of  the  full  com- 
mittee, it  is  the  normal  practice  to  have  witnesses  who  will  present 
testimony  in  set  sessions  to  take  an  oath.  So  if  you  gentlemen 
would  please  rise  with  me,  I'll  administer  that  oath. 

[Witnesses  sworn.] 

Mr.  McHuGH.  Thank  you.  Before  we  begin  with  Chairman 
Gleiman's  testimony,  I  would  like  to  recognize  one  of  the  more  ex- 
perienced and  senior  members  of  this  subcommittee  who  was  an 
outstanding  Representative  during  the  full  committee  era,  the  gen- 
tleman from  New  York,  Mr.  Oilman. 

Mr.  Oilman.  Thank  you,  Mr.  Chairman.  First  of  all,  I  would  like 
to  thank  you  for  calling  this  second  meeting  in  a  series  of  our  hear- 
ings to  address  the  issues  that  the  Postal  Service  is  going  to  have 
to  confront  in  the  coming  months. 

And  I  want  to  welcome  the  Honorable  Edward  Oleiman,  chair- 
man of  the  Postal  Rate  Commission,  as  well  as  our  other  commis- 
sioners who  are  with  him  here  today.  And  I  am  pleased  that  our 
chairman  of  our  committee,  Mr.  CUnger,  is  here  with  us  today. 

Last  week,  we  had  what  I  consider  to  be  an  extremely  productive 
exchange,  an  exchange  of  ideas  with  the  Postmaster  Oeneral,  Mr. 
Runyon.  And  I  trust  that  this  hearing  will  be  equally  constructive 
in  terms  of  trying  to  improve  the  efficiency  and  the  customer  serv- 
ice provided  by  the  Postal  Service,  as  well  as  the  entire  rate  struc- 
ture that  goes  with  it. 

To  this  end,  I'm  encouraged  by  the  efforts  that  Chairman 
Oleiman  has  undertaken  with  Postmaster  Oeneral  Runyon  to  try 
to  streamline  the  rate-setting  process,  while  protecting  the  inter- 
ests of  postal  customers. 

Mr.  Chairman,  I  look  forward  to  hearing  the  testimony  of  our 
panel.  And  we  thank  you,  again,  Mr.  Chairman,  for  doing  this  in 
a  timely  manner. 

Mr.  McHuGH.  I  thank  the  gentleman  for  his  presence  and  his 
contributions  to  the  effort. 

I  would  also  like  to  recognize  the  vice  chairman  of  the  sub- 
committee, the  gentleman  from  South  Carolina,  the  Honorable 
Mark  Sanford. 

Mr.  Sanford.  I  have  no  opening  statement  and  look  forward  to 
their  testimony. 

Mr.  McHuGH.  Thank  you  very  much.  With  that,  Mr.  Chairman, 
the  time  is  yours.  We  look  forward  to  your  comments. 



Mr.  Gleiman.  Mr.  Chairman,  members  of  the  committee,  I  feel 
kind  of  awkward  sitting  in  this  chair  today.  As  it  turns  out,  I  spent 
some  of  the  best  10  years  of  my  life  sitting  in  the  seat  that  is  cur- 
rently occupied  by  Gary  Brick  this  morning.  If  he  turns  it  over, 
he'll  find  my  initials  under  there. 

I  spent  a  good  number  of  years  doing  postal  oversight  hearings 
in  this  very  room  as  a  staffer  on  your  predecessor  committee,  the 
Government  Operations  Committee.  It  is  indeed  a  pleasure  to  be 
here  this  morning. 

I'm  Ed  Gleiman.  With  me  today  are  my  vice  chairman  at  the 
commission,  Trey  LeBlanc,  and  Commissioners  George  Haley,  Ed 
Quick,  and  Wayne  Schley.  Together,  the  5  of  us  compromise  one- 
tenth  of  the  50  people  who  work  at  the  Postal  Rate  Commission. 
While  we  are  small,  we  play  a  very  important  role  in  postal  affairs. 

The  commission  was  created  by  a  Congress  that  by  1970  had 
grown  weary  of  the  political  brawls  involved  in  setting  postal  rates. 
The  commission  was  charged  to  ensure  equitable,  reasonable,  and 
sufficient  rates  and  to  prevent  unfair  exploitation  of  the  monopoly 
afforded  the  Postal  Service  under  the  Private  Express  Statutes. 

Our  primary  responsibility  is  recommending  postal  rates.  By  law, 
a  rate  case  should  be  decided  within  10  months.  I'm  proud  to  report 
that  the  commission  issued  its  recommended  decision  in  the  last 
case,  R94— 1,  5  weeks  ahead  of  the  10-month  statutory  deadline,  en- 
abling a  financially  strapped  Postal  Service  to  implement  new  rates 
much  earlier  than  had  been  planned  and  to  realize  an  additional 
$500  million  in  much-needed  revenue. 

On  Tuesday  last,  the  Postmaster  General  reported  to  the  Treas- 
ury-Postal Service-General  Government  Subcommittee  preliminary 
net  income  of  $531  million  through  the  first  5  months  of  the  cur- 
rent fiscal  year.  Mr.  Runyon's  good  news  is  due  in  large  part  to  the 
commission's  early  decision  in  the  last  rate  case. 

We  have  responsibilities  other  than  rate  cases.  Among  them  are 
mail  classification  proceedings,  which  determine  the  groupings  and 
classes  or  subclasses  to  which  rates  are  assigned.  We  expect  shortly 
to  have  the  Postal  Service  submit  a  substantial  overhaul  of  the 
mail  classification  system.  Postal  officials  have  been  promising, 
perhaps  threatening,  to  do  so  for  more  than  a  few  years  now. 

Additionally,  persons  who  believe  that  postal  rates  or  services  do 
not  meet  the  requirements  of  the  Postal  Reorganization  Act  may 
file  complaints  with  the  commission.  Complaints  can  result  in  a 
general  rulemaking  inquiry,  as  was  the  case  in  1992,  when  a  num- 
ber of  major  mailers  petitioned  the  commission  to  investigate  why 
about  one-quarter  of  mail  processing  costs  were  classified  by  the 
Postal  Service  as  nonproductive  time. 

Unfortunately,  the  Postal  Service  refused  to  participate  in  that 
inquiry,  which  was  initiated  on  behalf  of  some  of  its  largest  cus- 
tomers and  the  effort  was  terminated. 


Similarly,  the  Postal  Reorganization  Act  gives  the  commission  an 
advisory  responsibility  with  respect  to  proposed  nationwide  or  sub- 
stantially nationwide  changes  in  postal  services.  If  the  Postal  Serv- 
ice proposes  to  make  such  a  change,  it  must  submit  the  proposal 
to  the  commission. 

The  most  recent  advisory  effort  took  place  in  1989  and  pertained 
to  the  Postal  Service's  lowering  of  delivery  standards.  Some  pre- 
viously 1-day  delivery  areas  became  2-day  delivery  areas,  some  2- 
day  delivery  areas  became  3-day  delivery  areas,  and  so  on. 

Senator  David  Pryor,  then  chairman  of  the  Senate  Postal  Sub- 
committee, likened  this  action  to  the  Postal  Service  cutting  the  top 
off  the  flagpole  when  the  flag  got  stuck  part  way  up,  so  that  people 
will  think  the  flag  is  really  flying  at  the  top  of  the  pole. 

I  think  we  all  need  to  remember  that  current  reports  on  service, 
both  the  good  and  the  bad,  are  measured  against  these  new,  lower 
standards  that  have  been  in  effect  since  1989. 

Another  of  our  responsibilities  is  review  of  post  office  closings 
when  we  are  requested  to  do  so  by  affected  townspeople.  Approxi- 
mately 10  percent  of  post  office  closings,  about  250,  have  been  ap- 
pealed to  the  Postal  Rate  Commission. 

And  finally,  from  time  to  time,  Congress  requests  the  commission 
to  conduct  studies  on  particular  subjects.  The  most  recent  request 
resulted  in  a  report  on  incentives  for  mailers  to  use  recycled  mate- 

Another  recent  study  of  the  adequacy  of  international  rates,  re- 
quested by  the  Senate  subcommittee,  both  the  chairman  and  the 
ranking  member,  is  in  limbo  because  the  Postal  Service  yet  again 
refused  to  cooperate  with  the  study. 

Now,  if  I  may  turn  to  the  rate-setting  process.  Only  the  Postal 
Service  may  initiate  a  rate  case.  It  decides  when  to  file  a  request, 
and  it  decides  for  how  much  additional  revenue.  The  law  requires 
that  "each  class  of  mail  or  type  of  mail  service  shall  bear  the  direct 
and  indirect  postal  cost  attributable  to  that  class  or  type,  plus  that 
portion  of  all  other  costs  of  the  Postal  Service  reasonably  assign- 

Much  of  our  time  is  devoted  to  analyzing  postal  operations  and 
data  to  assure  that  we  identify  those  costs  which  can  fairly  be  said 
to  have  been  caused  by  a  particular  class  of  mail  or  t3T)e  of  mail 
service.  About  two-thirds  of  the  cost  of  the  Postal  Service  can  caus- 
ally be  related  to  classes  and  services.  Those  costs  which  cannot  be 
attributed,  the  remaining  one-third, ,  are  assigned  pursuant  to  stat- 
utory guidance. 

The  rate-setting  process  is  heavily  dependent  on  information  col- 
lected and  provided  by  the  Postal  Service.  This  information  is  es- 
sential to  establish  fair  and  equitable  rates. 

Unfortunately,  both  intervenors  and  the  commission  have  become 
increasingly  concerned  about  the  quality  and  quantity  of  informa- 
tion presented  by  the  Postal  Service.  Deficiencies  in  the  R94-1  pro- 
ceedings ranged  from  a  virtual  absence  of  special  studies  to  reflect 
changes  in  postal  operations  to  serious  overstatements  of  cost. 

The  stakes  in  an  Omnibus  Rate  Case  are  enormous,  and  a  rate 
case  is  a  zero  sum  gain.  Each  subclass  must  provide  enough  reve- 
nue to  cover  its  attributable  cost  and  to  make  a  reasonable  con- 
tribution to  overhead.  There  is  a  great  deal  of  money  at  stake,  cur- 


rently,  about  $54  million,  and  parties  perceive  themselves  as  win- 
ners and  losers.  In  this  regard,  the  commission  faces  a  situation 
and  criticism  which  is  much  akin  to  what  the  Congress  faces  when 
it  attempts  to  balance  the  budget. 

Some  have  argued  that  the  rate-setting  process  takes  too  long 
and  is  too  cumbersome,  but  the  procedures  for  developing  rate  rec- 
ommendations are  designed  to  maximize  meaningful  public  partici- 
pation. The  Postal  Service  must  provide  evidence  in  support  of  any 
changes  it  requests,  interested  parties  may  intervene,  question  the 
Postal  Service,  and  provide  whatever  evidence  they  consider  rel- 
evant to  the  commission's  responsibilities. 

Written  discovery  of  underlying  facts  is  allowed.  Evidence  is  pre- 
sented under  oath  and  is  subject  to  cross  examination  by  interested 
participants.  Time  is  allowed  for  the  Postal  Service  to  present  re- 
buttal testimony,  and  both  the  Postal  Service  and  interested  par- 
ties prepare  detailed,  written  briefs  and  oral  arguments. 

Yes,  the  process  is  technical  and  detailed  in  a  fashion  that  some 
could  call  cumbersome.  But  it  is  open,  and  it  affords  an  opportunity 
for  all  parties  to  protect  their  interests  and  their  pocketbooks  in 
dealing  with  a  large  government  monopoly. 

We  are  particularly  interested  in  streamlining  and  expediting 
procedures  and  in  providing  the  Postal  Service  with  an  opportunity 
to  experiment.  As  you  mentioned,  Mr.  Chairman,  I  have  had  some 
discussions  with  the  Postmaster  General  on  these  matters.  And 
also,  immediately  after  the  rate  case  decision  was  issued  in  Novem- 
ber, we  invited  public  comments  on  improving  the  process. 

We  also  reissued  rules  giving  the  Postal  Service  the  authority  to 
expedite  changes  in  Express  Mail  rates  to  meet  market  pressures. 
These  rules,  I  should  note,  were  previously  in  effect,  and  although 
designed  to  give  the  Postal  Service  flexibility  in  its  most  competi- 
tive area,  went  unused  by  the  Postal  Service  for  5  years. 

I  have  also  suggested  to  the  Postmaster  General  and  other  senior 
postal  officials  that  as  a  starting  point,  a  point  for  departure  for 
further  discussions,  postal  officials  should  dust  off  the  joint  Postal 
Rate  Commissioner/Postal  Governor  Blue  Ribbon  Task  Force  Re- 
port, which  was  shelved  by  the  Postmaster  Greneral  during  his  1992 
reorganization  and  downsizing. 

Let  me  note,  however,  that  whatever  its  warts,  the  current  proc- 
ess does  uncover  deficiencies  in  the  Postal  Service's  proposals,  and 
it  does  result  in  fairer  rates. 

There  were  three  examples  from  the  last  rate  case  that  I  listed 
in  my  prepared  text.  I  only  want  to  mention  one  of  them  today  in 
the  interest  of  time,  and  that  involved  the  National  Newspaper  As- 
sociation. The  National  Newspaper  Association  challenged  the 
Postal  Service's  proposed  34  percent  increase  for  in-county  second- 
class  rates.  Those  are  the  rates  that  are  paid  by  the  relatively 
small  but  tremendously  important  community  newspapers. 

In  response  to  discovery  and  in  response  to  several  inquiries  and 
interrogatories,  the  Postal  Service  reexamined  its  in-county  pro- 
posal, found  an  error,  and  revised  its  proposal.  What  had  been  a 
34  percent  increase  became  a  1.5  percent  decrease. 

This  change  and  others  mentioned  in  my  prepared  statement, 
plus  others  that  were  not  mentioned  in  my  prepared  statement 


would  not  have  occurred  were  it  not  for  the  procedural  safeguards 
of  the  current  rate-setting  process. 

As  I  mentioned  in  my  prepared  statement,  even  the  Postal  Serv- 
ice has  perhaps  unintentionally  touted  changes  the  commission 
made  in  its  most  recent  recommended  rates,  advising  mailers  in 
the  January  edition  of  its  Memos  to  Mailers  to  "take  advantage  of 
our  various  services  by  making  smart  mailing  decisions." 

The  smart  mailing  decisions  involved  the  extra  ounce  rate  for 
first  class  mail.  Priority  Mail  rates,  and  Express  Mail  rates.  Each 
of  those  "smart  decisions"  involved  rates  recommended  by  the  com- 
mission. They  involved  rates  which  were  lower  than  what  I  guess 
are  the  not-so-smart  rates  originally  proposed  by  the  Postal  Serv- 

I've  tried  to  describe  who  we  are  and  what  we  do.  Now,  the  ques- 
tion is,  where  do  we  go  from  here?  With  respect  to  the  cries  for 
wholesale  change  to  provide  speed  and  flexibility,  I  urge  you  to  re- 
member, under  current  law,  these  proceedings  are  designed  to  en- 
sure fairness  £ind  allow  all  interested  parties  an  opportunity  to  par- 
ticipate in  a  meaningful  way. 

We  are  dealing  here  with  a  government-granted  monopoly,  a  $54 
billion  gorilla  whose  activities,  if  not  monitored  closely  and  con- 
trolled in  a  reasonable  manner  by  someone,  could  cause  serious 
economic  consequences  for  friend  and  foe  alike.  Private  companies 
could  easily  be  put  out  of  business,  and  private  citizens  could  easily 
wind  up  paying  much  more  to  mail  a  letter. 

Several  corporations  spend  literally  tens  of  millions  of  dollars  on 
postage  annually.  And,  of  course,  the  general  public  spends  billions. 
It  is  and  will  always  be  important  that  postal  customers  have  an 
adequate  opportunity  to  critically  review  the  Postal  Service  propos- 
als in  a  public  forum  and  present  their  concerns  to  an  independent 
decisionmaker  before  rates  are  changed. 

Now,  as  for  the  Postal  Service,  it  is  at  a  crossroads  with  no  sign- 
post. As  it  did  25  years  ago,  Congress  should  provide  direction.  A 
major  public  policy  question  needs  to  be  answered.  And  unless  Con- 
gress acts,  I  fear  that  by  default,  it  will  be  answered  by  Postal 
Service  managers.  The  question  is  both  simple  and  complicated.  It 
is  this,  what  do  we  want,  and  what  can  we  reasonably  expect  from 
our  Postal  Service?  Do  we  want  the  Postal  Service  to  limit  its  focus 
to  its  historical  mission,  the  reliable,  prompt  delivery  of  hard  copy 
mail,  or  do  we  want  it  to  attempt  to  compete  in  new  technologies 
and  enter  fields  heretofore  foreign  to  it? 

There  are  a  host  of  issues  which  must  be  considered  if  it  is  to 
compete  and  embark  on  new  ventures.  How  will  its  nonmonopoly 
and  monopoly  activities  interrelate?  Do  we  want  first  class  monop- 
oly revenues  to  subsidize  entry  into  new  and  risky  ventures? 

Csui  a  labor-intensive  organization  operate  in  an  entrepreneurial, 
capital-intensive  arena?  ^d,  since  it  takes  $1  billion  in  profit  to 
reduce  the  cost  of  a  first  class  stamp  by  a  single  penny,  are  the 
new  ventures  really  going  to  be  worth  it? 

I  ajjologize  for  ending  with  such  weighty  questions,  but  I  want 
to  thank  you  for  the  opportunity  to  unburden  myself  and  share 
them  with  you. 

Shortly,  we  will  hunker  down  in  our  offices  at  1333  H  Street, 
raise  our  ex  parte  walls,  and  begin  hearings  on  the  Postal  Service's 


reclassification  proposal.  But  I  want  to  say  publicly  what  I  have 
said  to  many  of  you  privately:  Please  do  not  hesitate  to  ask  for  our 
assistance  as  you  proceed  on  your  important  examination  of  our 
Nation's  postal  system. 

Thank  you,  sir,  and  if  you  have  any  questions,  we  would  be 
happy  to  try  to  answer  them. 

[The  prepared  statement  of  Mr.  Gleiman  follows:] 

Prepared  Statement  of  Edward  J.  Gleiman,  Chairman,  Postal  Rate 


Mr.  Chairman  and  Members  of  the  Subcommittee:  I  am  Edward  J.  Gleiman, 
Chairman  of  the  Postal  Rate  Commission.  With  me  today  are  Vice  Chairman  W.  H. 
"Trey"  LeBlanc,  and  Commissioners  George  W.  Haley,  H.  Edward  Quick,  Jr.,  and 
Wayne  A  Schley. 

This,  of  course,  is  our  first  appearance  before  this  Subcommittee,  and  we  look  for- 
ward to  getting  to  know  you  better  and  working  with  you.  I  have  had  the  oppor- 
tunity to  visit  personally  with  many  of  you.  I  appreciate  the  time  you  are  devoting 
to  postal  matters,  particularly  given  the  Oversight  and  Reform  Committee's  exten- 
sive role  in  other  aspects  of  the  House's  legislating  program  this  year. 


Together  the  five  of  us  comprise  one-tenth  of  the  50  people  who  work  at  the  Postal 
Rate  Commission.  Last  week  you  heard  from  the  head  of  the  Postal  Service,  Post- 
master General  Marvin  Runyon.  He  employs  more  than  800,000.  I  might  add  that 
while  the  Postal  Service  has  its  ups  and  downs,  it  is  now  as  large  as  before  its  1992 
downsizing.  The  Commission  has  become  smaller  and  intends  to  stay  small. 

While  we  are  small,  we  play  a  very  important  role  in  postal  affairs.  We  are  a  crea- 
ture of  a  Congress  that  by  1970  had  tired  of  managing  a  Post  Office  Department, 
which  required  larger  and  larger  taxpayer  subsidies  to  stay  afloat.  The  Congress 
also  had  grown  weary  of  the  political  brawls  involved  in  setting  postal  rates.  Bom 
of  a  legislative  compromise  between  the  House  and  the  Senate,  the  Commission  was 
charged  with  overseeing  the  statutory  requirement  that  "[pjostal  rates  and  fees 
shall  be  reasonable  and  equitable  and  sufficient  to  enable  the  Postal  Service  under 
honest,  efficient,  and  economical  management  to  maintain  and  continue  the  develop- 
ment of  postal  services  of  the  kind  and  quality  adapted  to  the  needs  of  the  United 
States."  1 

The  Commission  was  created  to  prevent  the  unfair  exploitation  of  the  monopoly 
afforded  the  Postal  Service  under  the  Private  Express  Statutes;^  a  monopoly  which 
applies  to  more  than  80  percent  of  domestic  mail  volume  and  generates  about  $42 
billion  of  the  Postal  Service's  annual  revenues  of  about  $54  billion.  In  the  view  of 
the  National  Newspaper  Association,  whose  members  publish  those  relatively  small 
but  tremendously  important  community  newspapers,  one  of  the  benefits  of  the  Post- 
al Rate  Commission  is  the  fact  that  it  serves  as  a  check  on  the  Postal  Service  and 
its  data  systems.^  The  Commission  is  the  only  check  on  the  Postal  Service  in  this 

Under  the  Postal  Reorganization  Act,^  the  Commission  is  an  "independent  estab- 
lishment of  the  executive  branch."^  We  are  similar  to  a  public  utility  commission, 
but  we  recommend  rates  for  only  one  body,  the  Postal  Service.  We  also  house  the 
Office  of  the  Consumer  Advocate  (OCA)  which,  by  law,  is  required  "to  represent  the 
interests  of  the  general  public"  in  rate  and  classification  cases.^  The  OCA  is  charged 
with  assisting  the  Commission  in  developing  a  complete  and  accurate  record  and  ar- 
guing for  equity  on  behalf  of  the  general  public  (principally  those  segments  which 
are  not  otherwise  represented  in  rate  or  classification  proceedings). '^ 

We  employ  6  attorneys,  18  analysts,  and  11  administrative  and  support  personnel 
(including  9  staff  of  the  Office  of  the  Consumer  Advocate).  Oiu-  staffing  is  at  an  his- 
torical low,  having  reached  a  high  point  of  78  in  1978.  Our  budget  for  fiscal  year 
1995  is  $5,925  mfllion — a  decrease  of  almost  2  percent  fi-om  fiscal  year  1994.  Oiu- 

139U.S.C.  §3621. 

2 18  U.S.C.  §§  1693-1699,  39  U.S.C.  §§  601-606. 

^PRC  Recommends  Slight  Increase  in  In-County  Rates,  Publishers  Aiudlliary,  p.  2,  (December 
5   1994) 
'  4  Public  Law  91-375.  84  Stat.  719,  39  U.S.C.  §§  101  et  seq. 
639  U.S.C.  § 3601(a). 
8  39  U  B.C.  §  3624(a) 
'  Statement  of  Policy,  Postal  Rate  Commission  (June  14,  1982). 


budget,  like  our  staffing,  has  been  shrinking.  The  cut  for  fiscal  year  1995  was  our 
second  consecutive  decrease.  We  receive  no  appropriated  funds  and  therefore  no  tax 
dollars.  We  are  funded  by  the  users  of  the  mails  through  postage.  Each  year  we  sub- 
mit our  budget  to  the  Governors  of  the  Postal  Service  for  their  review  and,  we  hope, 

Our  primary  responsibility,  is  recommending  postal  rates.  Since  its  creation  the 
Commission  has  issued  recommended  decisions  in  nine  omnibus  rate  cases,  i.e., 
cases  which  affect  all  classes  of  mail.  Rate  cases  are  designated  by  the  letter  "R," 
followed  by  the  year  of  the  Postal  Service's  request  and  the  case  number.  For  exam- 
ple, R94-1  is  the  most  recent  decision  issued  last  November.^  By  law,  a  rate  case 
should  be  decided  in  10  months.  A  typical  case  will  involve  75  to  100  parties,  100 
to  150  witnesses,  tens  of  tiiousands  of  pages  of  testimony,  and  many,  many  days 
of  public  hearings.^  I  am  proud  to  report  that  the  Commission  issued  its  Rec- 
ommended Decision  in  the  last  case  (R94-1),  five  weeks  ahead  of  the  10-month  stat- 
utory deadline,  enabling  a  financially  strapped  Postal  Service  to  implement  new 
rates  that  much  earlier  and  to  realize  an  additional  $500  million  in  much-needed 

We  have  responsibilities  other  than  to  rate  cases.  We  hear  mail  classification  pro- 
ceedings. These  are  proceedings  which  determine  the  groupings  or  classes  and  sub- 
classes to  which  rates  are  assigned.  Since  postal  reorganization  there  have  been  42 
separate  mail  classification  proceedings.  We  expect  the  Postal  Service  shortly  to  re- 
quest a  substantial  overhaul  of  the  mail  classification  system — postal  officials  have 
been  promising  to  do  so  for  several  years  now. 

Additionally,  persons  who  believe  that  postal  rates  or  services  provided  do  not 
meet  the  requirements  of  the  Postal  Reorganization  Act  may  file  complaints  with 
the  Commission.  The  Commission  can  hold  public  hearings  to  evaluate  complaints 
with  nationwide  ramifications.  Complaints  may  concern  a  wide  range  of  topics.  For 
example,  the  Commission  has  heard  assertions  that  the  rates  for  third-class  carrier 
route  catalogs  are  too  high,  as  well  as  objections  to  a  change  of  less  than  two  hours 
in  the  time  3ie  Farmers  State  Bank  of  Huntley,  Minnesota  receives  its  mail. 

Similarly,  the  Postal  Reorganization  Act  gives  the  Commission  an  advisory  re- 
sponsibility with  respect  to  proposed  nationwide  or  substantially  nationwide 
changes  in  postal  service.^*'  If  the  Postal  Service  proposes  to  make  such  a  change 
it  must  submit  the  proposal  to  the  Commission  which  then  must  hold  public  hear- 
ings on  the  proposal.  1^ 

In  1976,  Congress  amended  the  Postal  Reorganization  Act  to  provide  for  Commis- 
sion review  of  post  office  closings  or  consolidations.  ^^  Since  then  the  law  has  speci- 
fied the  factors  the  Postal  Service  must  take  into  consideration  before  closing  or  con- 
solidating a  post  office.  13  The  Commission  has  completed  250  of  these  appeals  and 
2  are  now  pending.  Finally,  fii^m  time-to-time  the  Congress  requests  the  Commis- 
sion to  conduct  studies  of  particvdar  subjects.  The  most  recent  request  resulted  in 
a  report  on  incentives  for  mailers  to  use  recycled  materials,  i'*  Attachment  I  summa- 
rizes the  Commission's  workload  during  the  interval  between  the  last  two  omnibus 
rate  cases  and  includes  a  list  of  other  studies  undertaken  for  the  Congress. 


Prior  to  1971,  postal  rates  were  set  by  the  Congress  through  the  legislative  proc- 
ess. From  1900  to  1970,  postal  rates  were  changed  six  times.  Also  prior  to  1971, 
the  Post  OflBce  Department  was  heavily  subsidized  by  the  taxpayer.  ^^  This  enabled 

8The  9  rate  decisions  are:  R71-1,  R74-1,  R76-1,  R77-1,  R80-1,  R84-1,  R87-1,  R90-1,  and 

^In  R90-1,  78  parties  entered  appearances  and  130  witnesses  presented  testimony. 

»«39U.S.C.§  3661(b). 

1139U.S.C.  §  3661(c). 

i2The  Pbstal  Reorganization  Act  Amendments  of  1976,  Public  Law  94-421,  90  Stat.  1303,  §9. 

1^39  U.S.C.  §404(bX2)  provides  the  Postal  Service  shall  consider  the  following:  "(A)  the  effect 
of  such  closing  or  consolidation  on  the  community  served  by  such  fx)st  office;  (B)  the  effect  of 
such  closing  or  consolidation  on  employees  of  the  Postal  Service  employed  at  such  office;  (C) 
whether  such  closing  or  consolidation  is  consistent  with  the  policy  of  the  (jovemment,  as  stated 
in  section  101(b)  of  this  title,  that  the  Postal  Service  shall  provide  a  maximum  degree  of  effec- 
tive and  r^ular  postal  services  to  rural  areas,  communities,  and  small  towns  where  post  offices 
are  not  self  sustaining;  (D)  the  economic  savings  to  the  Postal  Service  resulting  from  such  clos- 
ing or  consolidation;  and  (E)  such  other  factors  as  the  Postal  Service  determines  are  necessary." 

*" Postal  Rate  Ck)mmission,  Inquiry  Into  Incentive  for  Recycled  Mail  (August  1993). 

•5  In  his  May  17,  1969  "Message  Relative  to  Reform  of  ttie  Nation's  Postal  System"  President 
Richard  M.  Nixon  pointed  out  that  "[djuring  all  but  seventeen  years  since  1838  when  deficit  fi- 
nancing became  a  way  of  life  for  the  Post  Office,  the  postal  system  has  cost  more  than  it  has 



the  Congress  to  maintain  low  postal  rates.  Today,  the  Postal  Service  receives  almost 
no  taxpayer  funding. 

Because  the  Postal  Service  is  intended  to  be  self-sufficient,  the  Postal  Reorganiza- 
tion Act  directs  that  rates  be  set  to  allow  it  to  operate  at  "break  even."  Since  Postal 
Service  revenues  from  all  sources  should  equal  its  expenses,  rates  must  be  estab- 
hshed  which  preserve  this  equilibrium.  The  Commission  must  recommend  rates 
which  provide  sufficient  revenues  to  equal  total  estimated  costs  for  the  Service,  in- 
cluding operating  expenses,  depreciation,  and  debt  service.  The  statute  also  requires 
that  postal  rates  be  set  high  enough  to  provide  a  reasonable  amount  for  unexpected 
contingencies.  ^^ 

Only  the  Postal  Service  may  initiate  a  rate  case.  On  occasion  it  has  failed  to  re- 
quest rate  adjustments  until  it  has  sustained  substantial  losses,  and  as  a  result,  the 
equity  position  of  the  Postal  Service  has  deteriorated.  At  the  close  of  fiscal  year 
1994,  the  Postal  Service  had  a  negative  equity  position  of  about  $6  billion.  The  rate 
increases  recommended  by  the  Commission  include  amounts  designed  to  recover 
these  prior  years'  losses  in  manageable  annual  increments.  Current  rates  include 
the  annual  recovery  of  1/9  of  accumulated  Postal  Service  losses  each  year.  Unfortu- 
nately, in  recent  years  postal  management  has  been  using  this  revenue  to  meet  op- 
erating expenses  rather  than  to  retire  debt. 

The  law  requires  that  "each  class  of  mail  or  type  of  mail  service  [shall]  bear  the 
direct  and  indirect  Postal  costs  attributable  to  that  class  or  type  plus  that  portion 
of  all  other  costs  of  the  Postal  Service  reasonably  assignable  .  .  ."  i'  These  "direct 
and  indirect  costs"  are  commonly  referred  to  as  "attributable  costs,"  and  much  of 
our  time  is  devoted  to  analyzing  postal  operations  to  assure  that  we  identify  those 
costs  which  can  fairly  be  said  to  have  been  caused  by  a  particular  class  of  mail  or 
type  of  mail  service.  About  two-thirds  of  the  costs  of  the  Postal  Service  can  be  caus- 
ally related  to  classes  and  services,  and  therefore  attributed.  Those  costs  which  can- 
not be  attributed,  the  remaining  one-third,  are  considered  institutional  or  overhead 
costs  and  assigned  pursuant  to  statutory  guidance  as  explained  below. 

The  determination  of  attributable  costs  requires  an  evaluation  of  often  sophisti- 
cated quantitative  evidence  presented  by  the  Postal  Service  and  the  parties.  Costs 
fully  attributed  include  in-office  sorting  operations  performed  by  clerks, 
mailhandlers,  and  carriers.  Purchased  transportation  costs,  such  as  sending  mail  be- 
tween cities  on  commercial  airlines,  are  about  84  percent  attributable.  However, 
only  about  39  percent  of  city  carrier  street  activity  costs  can  be  causally  related  to 
classes  at  this  time;  remaining  carrier  street  costs  are  considered  institutional. 

Other  examples  of  institutional  (overhead)  costs  include  executive  salaries  and  re- 
search and  development.  In  the  Postal  Reorganization  Act,  Congress  provided  gen- 
eral and  specific  factors  which  the  Commission  must  consider  in  assigning  institu- 
tional (overhead)  costs. 

First,  the  Commission  must  be  aware  of  the  numerous  pubUc  policies  incorporated 
throughout  the  Postal  Reorganization  Act,  such  as  the  need  for  tying  the  nation  to- 
gether through  the  business  and  personal  correspondence  of  the  people.  ^^  Rates  are 
to  be  fair  and  equitable  and  recognize  the  value  of  service  actually  provided  to  both 
senders  and  recipients. '^ 

The  Commission  must  consider  the  effect  of  increases  on  the  general  public,  mail 
users,  and  the  services  of  competitors,  keeping  in  mind  whether  alternative  means 
of  sending  and  receiving  both  letters  and  other  mail  at  reasonable  costs  are  avail- 
able. 20  The  degree  of  mail  preparation  performed  by  the  mailer,  and  the  importance 
of  a  simple  rate  structure  with  identifiable  relationships  between  rates  for  the  var- 
ious classes  of  mail  must  also  be  considered,  ^i 

Several  years  after  enacting  the  Postal  Reorganization  Act,  Congress  added  an  ad- 
ditional rate  setting  consideration.  22  That  consideration  requires  us  to  evaluate  the 
importance  of  the  educational,  cultural,  scientific,  and  informational  value  to  the  re- 

earned."  The  legislative  report  accompanying  H.R.  17070,  the  bill  which  was  to  become  the  Post- 
al Reorganization  Act,  noted  that  in  the  year  prior  to  reorganization  the  Post  Office  received 
a  taxpayer  subsidy  of  $1.4  billion.  H.  Kept.  No.  91-1104,  91st  Cong.,  2d  Sess.  5  (1970).  The  Post 
Office's  total  budget  for  that  year  was  $9.1  billion.  H.  Kept.  100-656,  Part  1,  100th  Cong.,  2d 
Sess.  4  (1988). 

>«39U.S.C.  §3621. 

»''39U.S.C.  §3622(bX3). 

"39  U.S.C.§  101(a). 

1939  U.S.C.  §§  3622(b)(1)  and  (2). 

2039  U.S.C.  §§  3622(b)(4)  and  (5). 

2>39  U.S.C.  §§ 3622(b)(6)  and  (7). 

22  The  Postal  Reorganization  Act  Amendments  of  1976,  Public  Law  94-421,  90  Stat.  1303. 
§  10. 


cipient  of  mail  matter. ^3  Finally,  the  Commission  may  consider  other  factors  it  has 
identified  as  important.^'*  Over  the  years  interested  parties  and  the  Postal  Service 
have  provided  significant  amounts  of  evidence  concerning  the  above  factors,  and  this 
reservoir  of  information  has  provided  the  basis  for  fair  and  reasonable  allocations 
of  institutional  costs  among  postal  customers. 

The  ratesetting  process  is  heavily  dependent  on  information  collected  and  pro- 
vidai  by  the  Postal  Service.  Only  the  Postal  Service  is  in  a  position  to  gather  data 
concerning  the  various  fimctions  and  activities  performed  by  the  Service  in  the 
course  of  its  operations  so  that  the  costs,  revenues,  and  volumes  for  the  different 
mail  categories  can  be  estimated.  This  involves  ongoing  systems,  such  as  the  In-Of- 
fice-Cost-System  for  in-ofllce  labor,  the  Carrier  Cost  System  for  city  carrier  out-of- 
office  activities  and  the  Transportation  Cost  System  for  purchased  transportation 
costs.  The  Service  also  performs  studies  to  support  proposals  for  special  rate  cat- 
egories, such  as  customer  discounts  for  mailer  worksharing  efforts  including  pre- 
sorting and  pre-barcoding  the  mail.  This  information  is  essential  to  establish  rates 
and  classifications  for  an  entity  like  the  Postal  Service  that  accounts  for  $54  billion 
in  annual  revenue  and  touches  the  lives  of  all  Americans. 

As  a  result  of  the  just-completed  rate  proceeding,  intervenors  and  the  Commission 
have  become  concerned  about  the  quality  and  quantity  of  information  presented  by 
the  Service.  In  the  first  section  of  the  R94-1  Opinion,  we  stated  "[t]he  Commission 
is  concerned  that  data  deficiencies  in  the  Postal  Service  filing  reflect  a  reduced  com- 
mitment to  the  task  of  developing  and  providing  reliable  data  for  parties  in  Commis- 
sion  proceedings.^  We  noted  that  these  deficiencies  ".  .  .  have  been  emphasized  by 
many  of  the  parties  to  this  proceeding."  ^s  Deficiencies  ranged  from  the  virtual  ab- 
sence of  spe<nal  studies  to  reflect  changes  in  operations  since  the  last  proceeding 
four  years  ago,  to  serious  overstatement  of  the  costs  of  second  class  in-county  (used 
primarily  by  small  newspapers)  and  business  reply  service.  Questions  were  also 
raised  by  the  parties  regarding  the  adequacy  of  current  cost  systems  in  Ught  of  the 
significant  changes  in  Postal  Service  operations  in  recent  years  and  the  reduction 
of  resources  devoted  to  data  collection  and  analysis  efforts. 

The  stakes  in  an  omnibus  rate  case  are  enormous,  probably  involving  more  money 
than  fmy  other  regulatory  proceeding,  federal,  state,  or  local.  And,  a  rate  case  is  a 
zero  sum  game — each  subclass  must  provide  enough  revenue  to  cover  its  attrib- 
utable costs  and  make  a  reasonable  contribution  to  overhead.  The  pie  charts  on  at- 
tachment II  demonstrate  how  the  postal  pie  is  divided  by  volume  and  by  revenues. 
For  example.  First  Class  accounts  for  53.9  percent  of  postal  volume;  but  generates 
64.6  percent  of  postal  revenue.  Compare  this  with  third-class  mail  which  accounts 
for  38.9  percent  of  volume  but  only  21.4  percent  of  revenue. 

Another  way  to  look  at  how  the  postal  pie  is  sliced  is  demonstrated  by  the  bar 
chart  on  attachment  III.  It  compares  the  relative  contributions  to  attributable  costs 
and  institutional  costs  of  First,-  second,-  and  third-class  maU.  Remember,  it  shows 
how  about  $54  biUion  are  allocated.  An  average  First-Class  letter  costs  19.8  cents 
to  collect,  sort,  and  deliver  and  contributes  14.7  cents  to  institutional  costs,  or  over- 
head. Thus,  its  percentage  contribution  to  overhead  is  about  42.6  percent.  Compare 
this  with  the  average  third-class  piece  which  costs  11.7  cents  and  contributes  6.0 
cents  to  overhead.  Its  percentage  contribution  to  overhead  is  about  33.9  percent. 

Overall,  First-Class  mail  pasrs  nearly  70  percent  of  the  overhead  of  the  Postal 
Service.  One  cent  on  the  First-Class  stamp  is  worth  about  $1  billion  in  revenues. 
So,  a  1-cent  change  in  the  First-Class  stamp,  given  the  zero-sum  nature  of  rate- 
making,  will  have  significant  affects  on  other  classes  of  mail. 

Today,  there  are  17  siibclasses  of  mail,  which  means  the  postal  pie  must  be  di- 
vided into  17  pieces.  In  addition,  there  are  more  than  100  worksharing  discounts, 
which  a£fect  the  postage  paid  by  different  mailers. 

The  procedures  for  developing  rate  recommendations  are  designed  to  maximize 
meaningful  public  participation.  The  Postal  Reorganization  Act  requires  the  Com- 
mission to  provide  the  opportunity  for  pubUc  hearings  and  to  base  its  decision  on 
an  evidentiary  record  developed  pursuant  to  the  Administrative  Procedure  Act. 

The  Postal  Service  must  provide  evidence  in  support  of  any  request  for  rate 
changes.  Interested  parties  may  intervene,  question  the  Postal  Service,  and  provide 
whatever  evidence  they  consider  relevant  to  the  Commission's  responsibilities.  Writ- 
ten discovery  of  underlying  facts  is  allowed.  Evidence  is  presented  under  oath  and 
is  subject  to  cross-examination  by  interested  participants.  Time  is  allowed  for  the 

23  39U.S.C.  §3622(bX8) 
2"»39U.S.C.  §3622(bX9) 
25PRC  Op.  R94-1,  para.  1028. 
2«PRC  Op.  R94-1.  para.  1029. 


Postal  Service  to  present  rebuttal  testimony,  and  for  both  the  Postal  Service  and 
interested  parties  to  prepare  detailed  written  briefs  and  oral  arguments. 


Some  have  argued  that  the  ratesetting  process  takes  too  long  ("setting  rates  takes 
longer  than  having  a  baby!")  and  is  too  cumbersome.  In  a  recent  speech,  the  Post- 
master General  described  the  process  as  "trench  warfare."  ^7  The  law  provides  10 
months  for  consideration  of  an  omnibus  rate  case,  and  with  the  exception  of  R94- 
1,  cases  consume  almost  every  allowable  day.  In  fact,  prior  to  the  enactment  of  the 
10-month  time  limit  in  1976,  one  rate  case  dragged  on  for  almost  two  years.  And 
the  process  is  technical  and  detailed  in  a  fashion  that  some  could  call  cumbersome. 
Vast  amounts  of  information  are  introduced  by  the  Postal  Service  and  interested 
parties  to  support  their  views  as  to  what  rates  are  appropriate. 

We  are  certainly  interested  in  streamlining  and  expediting  proceedings.  To  this 
end  I  have  initiated  several  meetings  with  the  Postmaster  General  and  immediately 
after  our  rate  decision  last  November,  we  invited  pubUc  comments  on  improving  the 
process.  We  also  reissued  rules  giving  the  Postal  Service  the  authority  to  expedite 
changes  in  Express  Mail  rates  to  meet  market  pressures.  (These  rules,  I  should 
note,  were  previously  in  effect  and  went  unused  for  five  years.)  But  remember, 
under  current  law  these  proceedings  are  designed  to  ensure  fairness  and  allow  all 
interested  parties  the  opportunity  to  participate  in  a  meaningful  way. 

Before  my  appointment  to  the  Commission,  I  considered  10  months  a  substantial 
period  of  time.  Now,  having  served  as  the  presiding  officer  in  a  rate  case,  I  have 
the  perspective  to  reaUze  how  much  time  it  takes  to  effectively  marshall  facts  and 
prepare  technical  arguments.  Several  corporations  spend  literally  tens  of  millions  of 
dollars  on  postage  annually,  and  of  course  the  general  pubhc  spends  biUions.  It  is 
important  that  postal  customers  have  an  adequate  opportunity  to  critically  review 
Postal  Service  proposals  and  present  their  concerns  to  an  independent  decision 
maker  before  rates  are  changed. 

The  primary  advocate  for  streamlining  the  procedures  has  been  the  Postal  Service 
(Although,  frankly,  the  Postal  Service  has  objected  on  occasion  when  the  Commis- 
sion proposed  compressing  time  frames  in  proceedings.)  Of  course,  any  streamlining 
of  the  ratesetting  process  should  inure  to  the  benefit  of  the  Postal  Service  which  has 
unlimited  time  to  prepare  its  testimony,  massage  its  data,  and  refine  its  arguments 
before  filing  its  case.  Other  interested  parties  do  not  have  this  luxury,  and  any  re- 
duction in  their  time  to  respond  to  the  Postal  Service's  case  may  reduce  their  ability 
to  respond  adequately.^s  This  view,  I  might  add,  is  shared  by  nearly  everyone  of 
the  parties  who  commented  in  response  to  our  recent  inquiry  on  streamlining.  I  can 
make  those  comments  available  to  the  Subcommittee  if  you  would  like. 

Whatever  its  warts,  the  current  process  does  uncover  deficiencies  in  the  Postal 
Service's  proposals  and  result  in  fairer  rates.  Three  examples  from  the  R94— 1  case 
come  to  mina. 

Originally  the  Postal  Service  proposed  to  triple  the  fee  for  Automated  Business 
Reply  (BRMAS)  from  2  cents  to  6  cents.  BRMAS  automates  the  accounting  for  busi- 
ness reply  mail — mail  whose  postage  is  paid  by  the  recipient  such  as  magazine  sub- 
scription cards  inserted  in  a  magazine.  A  party  to  the  case  probed  the  Service's  pro- 
posal through  written  discovery  and  later  oral  cross-examination.  Significant  errors 
in  the  Postal  Service's  underlying  study  were  thus  discovered  leading  the  Commis- 
sion to  conclude  it  was  unreliable.  The  Commission  recommended  leaving  the  rate 
at  2  cents. 

The  National  Newspaper  Association  challenged  the  Postal  Service's  proposed  34 
percent  increase  for  in-county  second-class  rates.  In  response  to  several  interrog- 
atories, the  Postal  Service  reexamined  its  in-county  proposal,  found  an  error  and  re- 
vised its  proposal.  The  Commission  reduced  the  requested  34  percent  increase  to 
just  2  percent. 

Priority  mail  is  another  example.  The  Postal  Service  proposed  a  10  percent  in- 
crease in  these  rates.  Parties  pointed  out  to  the  Commission  that  Priority  mail, 
which  already  made  the  largest  percentage  contribution  to  institutional  costs  of  aU 
classes,  would  be  required  to  make  an  even  larger  contribution  under  the  Service's 
proposal.  The  parties  also  pointed  out  that  the  record  contained  no  demand  or  other 

*'  "The  postal  ratesetting  process  is  little  short  of  trench  warfare.  It  pits  product  against  prod- 
uct .  .  .  We  can  streamline  and  simplify  the  ratesetting  process."  Remarks  of  Postmaster  Gen- 
eral Runyon  before  the  National  Press  Club,  Washington,  D.C.  (January  31,  1995). 

28  The  10-month  time  limit  does  not  begin  to  nui  until  the  Postal  Service  requests  a  rate 
change.  39  U.S.C.  §3624(cXl).  The  Postal  Service  refuses  to  release  relevant  information  prior 
to  submitting  a  request,  so  the  parties  cannot  begin  to  analyze  the  Service's  filing  until  it  is 
formally  filed. 


factor  which  could  justify  this  increase.  The  Commission  agreed  and  reduced  the 
Priority  mail  increase  to  5  percent. 

None  of  these  changes  would  have  occurred  were  it  not  for  the  procedural  safe- 
guards the  ratesetting  process  provides.  And,  I  should  point,  none  would  have  oc- 
curred had  the  Commission  accepted  the  settlement  agreement  proposed  by  the 
Postal  Service  and  several  mailing  interests. 

Even  the  Postal  Service  has,  perhaps  unintentionally,  touted  changes  the  Com- 
mission made  in  its  most  recent  recommended  rates  advising  mailers  to: 

[T]ake  advantage  of  our  varied  services  by  making  smart  mailing  decisions 
.  .  .  For  example,  our  Express  Mail  service,  which  provides  overnight  delivery 
is  still  $10.75.  And  what  some  customers  call  our  best  deal.  Priority  Mail,  went 
up  just  10  cents.  It  is  now  only  $3  for  up  to  2  pounds  anywhere  in  the  country. 
For  letter  mail,  the  additional  ounce  remains  at  23  cents. '■^^ 
Each  of  these  "smart"  rates  were  rates  recommended  by  the  Commission  which  dif- 
fered from  those  which  the  Postal  Service  had  proposed  and  argued  for.  3° 


I  have  tried  to  describe  who  we  are  and  what  we  do.  Now,  the  question  is:  "Where 
do  we  go?". 

I  applaud  the  Subcommittee  for  beginning  this  series  of  hearings  which  I  under- 
stand will  explore  in  great  depth  the  Postal  Service  and  issues  surrounding  it.  This 
congressional  examination  is  much  needed. 

The  Postal  Service  is  at  a  cross  road  with  no  sign  post.  As  it  did  25  years  ago, 
Congress  should  provide  direction. 

A  major  pubUc  poUcy  question  needs  to  be  answered,  and  unless  Congress  acts 
I  fear  that  by  default  it  will  be  answered  by  Postal  Service  managers.  The  question 
is  both  simple  and  complicated.  It  is  this:  "What  do  we  want  and  what  can  we  rea- 
sonably expect  from  our  Postal  Service?" 

The  Postal  Service's  historical  mission  is  the  collection,  processing,  transportation, 
and  delivery  of  hard  copy  messages.  It  has  done  that  fairly  well  under  the  protection 
of  the  postal  monopoly  umbrella.  But  today  hard-copy  messaging  faces  growing  com- 
petition from  FAX,  E-Mgiil,  and  other  forms  of  electronic  transfer.  This  competition 
is  making  inroads  on  the  Postal  Service's  business.  In  his  recent  National  Press 
Club  address,  Postmaster  General  Rvmyon  indicated  the  Postal  Service  has  lost  up 
to  35  percent  of  financial  mail  volume.  And  other  types  of  business  to  business  com- 
munication, as  well  as  business  to  household  and  household  to  business  mail,  could 
similarly  be  lost  to  high-tech  competition — especially  if  the  Postal  Service  does  not 
deUver  as  promised.  I  suspect  it  will  not  take  more  than  a  few  "late  charges"  due 
to  delayed  or  non-deUvered  mortgage  payments  before  John  Q.  Public  switches  to 
direct  debit  or  computer  payment  of  his  biUs. 

So,  do  we  want  the  Postal  Service  to  limit  its  focus  to  its  historical  mission — the 
delivery  of  hard-copy  mail?  Do  we  want  it  to  become  a  lean,  mean  collection,  proc- 
essing, and  deUvery  machine  which  probably  means  little  growth  and  perhaps  even- 
tual downsizing?  Or,  do  we  want  it  to  attempt  to  compete  with  the  new  technology 
and  enter  fields  heretofore  foreign  to  it?  If  it  pursues  new,  competitive  markets,  will 
it  be  more  or  less  likely  to  perform  successfully? 

There  are  a  host  of  issues  which  must  be  considered  if  it  is  to  compete  and  em- 
bark on  new  ventiu^es.  How  will  its  non-monopoly  and  monopoly  activities  inter- 
relate? Can  a  labor  intensive  organization  operate  in  an  entrepreneurial,  capital  in- 
tensive arena?  And,  since  it  takes  $1  biUion  dollars  in  profit  to  reduce  the  cost  of 
a  First-Class  stamp  by  a  penny,  are  new  ventures  really  worth  the  effort? 

I  know  a  "privatization"  debate  is  likely.  Setting  aside  my  concern  as  to  what  is 
meant  by  "privatization"  (it  means  many  different  things  to  many  different  people), 
I  urge  you  to  consider  and  address  the  basic  public  policy  issue  I  have  posed  before 
attempting  to  make  decisions  on  "privatization." 

Thank  you  for  the  opportunity  to  share  these  thoughts.  Shortly,  we  will  hunker 
down  in  our  offices,  raise  our  ex  parte  walls,  and  begin  hearing  the  Postal  Service's 
reclassification  proposal.  But,  I  want  to  say  publicly  what  I  have  said  privately  to 
many  of  you.  Please  do  not  hesitate  to  ask  for  our  assistance  as  you  proceed  on  your 
examination  of  the  postal  community. 

29 United  States  Postal  Service,  Memo  to  Mailers,  January  1995,  at  2  (emphasis  added). 

^"The  Postal  Service  proposed  the  following:  Express  Mail  (8  ounce  letter  rate),  $10.95;  Prior- 
ity Mail  (2  pounds  and  under),  $3.20;  additional  ounce  (First-Class  letter),  25  cents.  PRC  Op. 
R94-1  at  iv. 




I.  Major  Cases 

A.  R90-1  Continuing  Matters 

1.  Reconsideration 

2.  Court  Case  (MOAA) 

3.  Remand 

B.  Classification  Cases 

II.  Special  Studies/Task  Forces 

A.  Congressional  Reports 

B.  Other  Studies 

C.  Joint  Task  Force  on  Postal  Ratemaking 

III.  Rulemakings 

IV.  Complaint  Cases 

V.  Appeals  of  Post  Office  Closings  and  Consolidations 

VI.  Research  and  Information  Support 

A.  Professional  Papers 

B.  Research  Assistance 

VII.  Administrative  Matters 


Sentence  Outline 

/.  Major  Cases  Since  Docket  No.  R90-1 


The  R90  decision  was  extended  by  reconsiderations  and  generated  two  additional 
major  areas  of  work  for  the  Commission:  a  court  case  and  a  remand  involving  addi- 
tional proceedings  at  the  Commission.  Attachment  A  summarizes  the  activity. 

1.  Reconsideration 

Although  the  Governors  of  the  Postal  Service  put  into  effect  most  of  the  R90  rate 
changes  recommended  by  the  Commission,  they  twice  requested  further  reconsider- 
ation of  portions  of  the  original  decision.  R90  was  almost  continually  before  the 
Commission  for  another  10  months  after  the  initial  decision  was  issued.  The  Com- 
mission, after  giving  interested  parties  an  opportunity  to  be  heard,  issued  two  addi- 
tional opinions. 

2.  The  court  case 

As  with  previous  omnibus  rate  decisions,  a  number  of  parties  exercised  their  stat- 
utory right  to  appeal  the  outcome  to  a  federal  court.  Commission  work  on  the  ensu- 
ing court  case  (popularly  referred  to  as  "MOAA")  entailed  coordinating  litigation 
strategy  with  the  Department  of  Justice;  writing  a  comprehensive  legal  brief,  as 
well  as  contributing  to  Justice's  brief;  and  delivering  an  oral  argument  before  the 

3.  The  R90  remand 

As  a  result  of  the  MOAA  case,  two  aspects  of  the  R90  decision  were  remanded 
to  the  Commission  for  additional  reconsideration.  One  was  the  carrier  street  time 
costing  issue;  the  other  was  the  Public's  Automation  Rate  category  of  First-Class 
Mail,  popularly  referred  to  as  "PAR." 

Like  an  omnibus  rate  case,  a  remand  triggers  procedural  requirements  for  public 
notice,  an  opportunity  to  intervene,  and  a  hearing  on  the  record  prior  to  issuance 
of  a  Commission  decision. 

In  this  instance,  the  Postal  Service  and  other  interested  parties  sought  additional 
hearings  on  the  city  carrier  issue,  but  not  on  PAR.  Accordingly,  the  Commission  con- 
tracted with  an  expert  witness,  represented  by  Commission  counsel,  who  prepared 
testimony  on  the  city  carrier  issue,  answered  numerous  written  interrogatories  and 
appeared  for  cross-examination.  As  no  parties  expressed  interest  in  additional  hear- 
ings on  PAR,  the  Commission  proceeded  with  this  aspect  of  the  remand  by  seeking 
legal  briefs  from  the  parties. 


Mail  classification,  which  involves  the  grouping  of  mail  matter  or  services  for  pur- 
poses of  developing  postal  rates  and  fees,  is  governed  by  legal  criteria  set  out  in  the 
Postal  Reorganization  Act.  Although  some  reclassification  usually  occurs  in  tandem 


with  omnibus  rate  cases,  the  Commission  also  handles  many  independent  cases. 
Since  Docket  R90,  there  have  been  six  of  these.  They  have  included  two  types  of 
discounts  for  prebarcoding;  a  discount  for  "palletizing";  and  a  discount  for  walk  se- 
quence sorting.  They  also  included  a  proposed  new  bulk  small  parcel  service  and 
modification  of  longstanding  second-class  mail  format  requirements  to  accommodate 
new  publishing  advances,  especially  electronic  media. 

While  narrower  than  omnibus  rate  cases  in  terms  of  issues,  classification  cases 
generate  active  participation  in  Commission  hearings  on  the  part  of  major  trade  as- 
sociations, coalitions  of  mailers,  and  individual  mail  users.  They  also  involve  dis- 
counts or  rate  changes  worth  a  considerable  amount  of  money  to  the  Service  and 
to  mailers.  Attachment  B  lists  these  cases. 

//.  Special  Studies  /  Task  Forces 

A  major  Commission  responsibility  developed  in  the  past  decade  is  to  provide  the 
Congress  with  expert  reports  on  specialized  topics  related  to  postal  rates  and  classi- 
fication. Since  R90,  the  Commission  has  responded  to  three  congressional  requests 
for  reports  or  studies.  The  Commission  and  senior  staff  also  have  participated  in  the 
only  joint  Postal  Service/Commission  task  force  since  Reorganization. 


1.  Third-Class  Nonprofit  Mail  Study 

The  Subcommittee  on  Treasury,  Postal  Service  and  General  Government  of  the 
Committee  on  Appropriations  of  the  U.S.  Senate  requested  that  the  Commission 
study  the  use  of  this  type  of  maU  and  develop  options  for  reducing  federal  appro- 
priations. One  aspect  of  the  study  included  a  major  research  survey  conducted  by 
a  nationally  recognized  market  research  firm.  The  Commission's  recommendations 
served  as  the  basis  for  legislative  reform  of  the  appropriations  formula. 

2.  International  Mail  Study 

Members  of  the  Senate  Committee  on  Governmental  Affairs  requested  the  Com- 
mission to  review  international  rates  and  reach  conclusions  on  three  points:  1) 
whether  international  rates  cover  variable  costs;  2)  whether  nonvariable  costs  exist 
which  would  be  attributed  if  associated  with  domestic  mail;  and  3;  whether  inter- 
national rates  make  an  appropriate  contribution  to  the  Service's  fixed  costs.  The 
Postal  Service  has  refused  to  provide  the  Commission  with  requested  data  that  is 
necessary  to  complete  this  study.  Until  the  Commission  receives  further  instructions 
from  the  requesters,  the  study  is  in  abeyance. 

3.  Recycled  Mail  Incentives 

In  response  to  a  request  fi-om  several  members  of  Congress,  the  Commission  re- 
viewed the  potential  for  a  rate  incentive  for  environmentally-sound  mailing  prac- 
tices. The  Commission's  two-volvmae  report  offers  a  comprehensive  look  at  com- 
menters'  positions  on  this  issue. 


The  Office  of  the  Consumer  Advocate  has  prepared  a  Study  of  the  Postal  Service's 
First-Class  Mail  Presort  Worksharing  Program. 


The  eight-member  Joint  Task  Force  included  two  former  Governors  of  the  Postal 
Service,  the  Vice-Chairman  of  the  Postal  Rate  Commission,  a  former  Postal  Rate 
Commissioner  and  senior  staff  from  both  agencies.  The  Task  Force's  report,  Postal 
Ratemaking  in  a  Time  of  Change,  contained  several  major  recommendations  for  im- 
provements in  the  ratemaking  process  that  covild  be  implemented  within  the  fi-ame- 
work  of  existing  legislation. 

III.  Rulemakings 

Like  other  federal  agencies  the  Commission  conducts  a  considerable  amount  of  of- 
ficial business  through  rulemakings.  These  generally  entail  either  an  adjudicative- 
type  hearing  with  party  participation  and  full  procedural  protections  or  notice-and- 
comment  proceedings  pubUshed  in  the  Federal  Register.  Since  Docket  No.  R90,  the 
Com^mission  has  docketed  five  rulemaking  proceedings  independent  of  any  maU  clas- 
sification case.  There  were  four  additional  rulemakings  instituted  either  to  amend 
the  Domestic  Mail  Classification  Schedule  or  to  clarify  the  Commission's  rules  of 
practice.  Attachment  C  lists  these  cases. 


P/.  Complaint  Cases 

By  statute  complaints  handled  by  the  Commission  must  raise  issues  of  nationwide 
applicability  concerning  the  policies  of  the  Postal  Reorganization  Act,  not  simply  is- 
sues about  particular  practices  that  affect  an  individual  mail  user  or  locality.  Al- 
though this  standard  forecloses  consideration  of  many  of  the  general  public's  com- 
plaints about  mail  service  and  rates,  the  Commission  nevertheless  has  docketed 
three  complaints  since  R90.  These  cover  subsidies  in  second-class  mail,  competition 
in  parcel  post,  and  administration  of  post  office  boxes.  See  Attachment  D. 

V.  Appeals  of  Post  Office  Closings  and  Consolidations 

By  law  patrons  of  post  offices  the  Service  intends  to  close  or  consoUdate  are  enti- 
tled to  appeal  to  the  Postal  Rate  Commission.  In  these  cases  the  Commission  func- 
tions as  a  reviewing  body,  much  like  an  appeals  court.  Accordingly,  it  evaluates  the 
legal  sufficiency  of  the  Postal  Service's  treatment  of  specific  issues.  This  involves  de- 
termining 1)  whether  the  Postal  Service  has  made,  on  the  record,  the  requisite  stat- 
utory findings,  and  2)  whether  these  findings  are  supported  by  substantial  evidence. 

Since  R90,  53  post  office  appeals  have  been  filed.  See  Attachment  E  for  a  list  of 
the  post  offices  and  the  Commission's  disposition  of  the  appeal. 

VI.  Research  and  Information  Support 


1.  An  Exploratory  Quantitative  Comparison  of  Postal  Administrations  in  Indus- 
trial Countries  (a  Commission  staff  paper  delivered  at  a  conference  on  Postal  and 
Delivery  Economics,  May,  1994,  Stockholm,  Sweden). 

2.  Regulation  of  Unregulated  Firms:  The  Postal  Service  and  UPS  (an  Office  of  the 
Consumer  Advocate  staff  paper  delivered  at  a  workshop  in  Postal  and  Delivery  Eco- 
nomics, June,  1994,  Hakone,  Japan). 

3.  Rural  Delivery  and  the  Universal  Service  Obligation:  A  Quantitative  Investiga- 
tion (a  Commission  staff  paper  delivered  at  the  Economics  of  Universal  Service 
Workshop,  April,  1993,  Konigswinter,  Germany). 


1.  Congressional  Committees  and  Executive  Agencies 

The  Commission  often  is  asked  informally  by  Congressional  appropriations  and 
oversight  committees  for  its  perspective  on  key  postal  issues.  Assistance  to  the  Gen- 
eral Accounting  Office  and  the  Office  of  Management  and  Budget  also  is  provided 
fi-equently  upon  request. 

2.  Public  Information 

a.  Through  its  Office  of  the  Consumer  Advocate  (OCA),  which  employs  seven  of 
the  Commission's  53  permanent  employees,  the  Commission  fulfills  its  legal  man- 
date to  represent  the  public  interest  in  postal  matters.  OCA  participates  as  an  inter- 
venor  in  all  rate  and  classification  cases.  It  also  conducts  its  own  economic  analysis 
of  postal  issues.  Its  staff  also  prepares  academic  papers  and  participates  in  technical 

b.  The  Commission  responds  to  numerous  telephone  calls  and  letters  fi-om  the 
general  public  about  postal  matters.  It  also  maintains  a  Commenter  file  to  record 
the  public's  position  on  issues  in  docketed  proceedings. 

VII.  Administrative  Matters 


Although  mainly  involved  in  matters  directly  related  to  postal  rates  and  classifica- 
tion, the  Commission  staff  also  works  on  issues  related  to  the  Freedom  of  Informa- 
tion Act,  the  Government  in  the  Sunshine  Act,  the  Ethics  in  Government  Act,  and 
government  contracting. 


The  Commission  has  been  updating  its  Docket  Room  capability  by  converting  to 
an  imaging  process.  This  will  facUitate  research,  file  maintenance  and  reduce  stor- 
age space  needs. 



The  Commission  is  an  active  participant  in  the  Small  Agency  Council,  which  fos- 
ters cooperation  and  support  in  providing  support  and  training  for  small  agency 
staffs  and  solutions  for  special  issues  and  problems  these  agencies  face. 


January  4,  1991 — Commission  issues  its  Opinion  and  Recommended  Decision  in 
Docket  R90-1.  ^  ^  t^    ■ 

May  24,  1991 — Commission  issues  its  Opinion  and  Further  Recommended  Deci- 
sion in  Docket  R90-1. 

October  4,  1991 — Commission  issues  its  Opinion  and  Recommended  Decision 
Upon  Further  Consideration. 

November  9,  1992— Justice  Department  files  Brief  for  Respondent  United  States 
Postal  Service,  assisted  by  the  Commission,  in  MOAA,  et  al.,  USPS,  U.S.  Court  of 
Appeals,  D.C.  Circmt. 

November  9,  1992 — Postal  Rate  Commission  files  brief  as  Respondent  on  issues 
raised  in  Governors  of  the  USPS  v.  Postal  Rate  Commission,  which  was  consolidated 
into  the  MOAA  case. 

February  18,  1994 — The  commission  institutes  remand  proceedings  by  reopening 
the  record  in  Docket  No.  R9(>-1. 


Docket  No.  MC91-1— Prebarcoded  Flats  Discounts:  The  Commission  rec- 
ommended, with  modifications,  Postal  Service  proposed  discounts  for  prebarcoded, 
flat-shaped  mail  in  First,  second  and  third  class. 

Docket  No.  MC91-2— 125-Piece  Walk-Sequence  Discount:  The  Commission 
recommended  Postal  Service  proposed  discounts  for  third-class  flats  which  are  pre- 
sented in  the  walk  sequence  of  the  carrier — with  125  pieces  per  route. 

Docket  No.  MC91-3 — Second-Class  Pallet  Discount:  The  Commission  rec- 
ommended, with  modifications.  Postal  Service  proposed  discounts  for  second  class 
presented  on  pallets. 

Docket  No.  MC92-3 — Second-Class  Eligibility:  The  Commission  opened  a 
docket  to  consider  whether  publications  printed  on  diskettes  rather  than  paper 
shoiild  be  allowed  to  use  second-class  rates. 

Docket  No.  MC93-1— Bulk  Small  Parcel  Service:  The  Commission  rec- 
ommended, with  modifications,  a  Postal  Service  proposal  for  discounts  for  small  par- 
cels entered  in  bulk. 

Docket  No.  MC93-2 — Deflnition  of  Prebarcoded  Mail:  The  Commission  rec- 
ommended a  Postal  Service  proposal  for  discounts  for  letter-size  mail  carrying  elev- 
en-digit barcodes  in  First,  second  and  third  class. 

Attachment  C — Rulemakings 

Docket  No.  RM91-1 — ^The  Commission  began  a  proceeding  to  offer  interested 
parties  an  opportunity  to  offer  suggestions  on  improving  the  practices  and  proce- 
dures used  in  considering  proposals  that  come  before  the  Commission. 

♦Docket  No.  RM92-1— Amendment  to  the  Domestic  Mail  Classification  Schedule 
pursuant  to  decisions  in  Docket  Nos.  R90-1  and  MC91-2. 

Docket  No.  RM92-2 — In  response  to  a  petition  fi-om  several  major  mailers,  the 
Commission  initiated  a  rulemalang  procedure  to  consider  the  treatment  of  automa- 
tion-related mail  processing  costs. 

Docket  No.  RM93-1 — ^The  Complexity  in  Rates  Inqmry  was  begun  to  allow  inter- 
ested parties  to  comment  on  the  appropriate  level  of  complexity  in  Postal  Service 
rates  and  classifications. 

♦Docket  No.  RM93-2 — Amendment  to  Domestic  Mail  Classification  Schedule 
pursuant  to  Decision  in  Docket  No.  MC91-1. 

Docket  No.  RM93-3 — Order  Adopting  Final  Rule  correcting  the  Commission's 
Rules  of  Practice  as  published  in  the  CFR. 

Docket  No.  RM93-4 — The  Commission  changed  its  personnel  regulations  in  ac- 
cordance with  recent  ethics  legislation. 

♦Docket  No.  RM94-1 — Amendment  to  Domestic  Mail  Classification  Schedule 
pursuant  to  the  Decision  in  Docket  No.  MC93-2. 

Docket  RM94-2 — The  Commission  has  opened  a  rulemaking  docket  to  consider 
a  proposal  to  amend  rules  governing  rate  fihngs. 

*  Complementary  to  a  mail  classification  proceeding. 


Attachment  D — Complaint  Cases 

Docket  No.  C91-1 — The  Commission  obtained  a  settlement  of  the  complaint 
about  the  Postal  Service's  plan  to  re-number  post  office  boxes  in  San  Francisco. 

Docket  No.  C93-1 — The  Citizens  for  a  Sound  Economy  Legal  Alliance  filed  a 
complaint  concerning  the  rates  paid  by  publishers  using  second  class. 

Docket  No.  C93-2— United  Parcel  Service  filed  a  complaint  arguing  that  parcel 
post  rates  were  not  in  compliance  with  the  law. 

Attachment  E— Appeals  of  Post  Office  Closings  and  Consolidations 
Decided  Since  January  1991 

Docket  No.  and  Name  of  City  Decision 

A91-1  Rock  Point,  MD Withdrawn 

A91-2  Northboro,  lA Affirmed 

A91-3  Seneca,  Ml Remanded 

A91-4  San  Francisco,  CA Dismissed;  lack  of  jurisdiction 

A91-5  Elsmere,  NE  Affirmed 

A91-6  Pardeesville,  PA Untimely 

A91-7  Weston.  Ml  Wittidrawn 

A91-8  Angus.  MN  Affirmed 

A91-9  Extension,  LA Remanded 

A91-10  Mount  Clemens,  Ml  Dismissed;  lack  of  jurisdiction 

A91-11  Jenkins  Bridge.  VA Withdrawn 

A91-12  Liberty,  NE  Affirmed 

A91-13  Wiley,  GA Withdrawn 

A91-14  Union  Level,  VA  Affirmed 

A92-1  Sample,  KY  Affirmed 

A92-2  Vernon,  OK Untimely 

A92-3  Susank,  KS  Affirmed 

A92-4  Carrothers,  OH Affirmed 

A92-5  Skene,  MS Affirmed 

A92-6  Village,  VA Withdrawn 

A92-7  Nooksack,  WA  Affirmed 

A92-8  Maskell,  NE Affirmed 

A92-9  Fabyan,  CT Affirmed 

A92-10  Ben  Arnold,  TX Affirmed 

A92-11  Buckeye,  LA  Affirmed 

A92-12  Summit,  KY Affirmed 

A92-13  Milfay.  OK Withdrawn 

A93-I  West  Rushville,  OH Remanded 

A93-2  Bavon,  VA Affirmed 

A93-3  Wolf  Run,  OH Withdrawn 

A93-4  Hertel,  Wl Withdrawn 

A93-5  Pershing,  lA Affirmed 

A93-6  Schroeder,  MN  Withdrawn 

A93-7  Frontenac,  MN  Remanded 

A93-8  Wolf  Lake,  MN  Affirmed 

A93-9  Segundo,  CO Affirmed 

A93-10  Beaverlett,  VA Affirmed 

A93-1 1  Colfax,NO  Withdrawn 

A93-12  McAdams,  MS Affirmed 

A93-13  Ithaca,  NY Dismissed;  lack  of  jurisdiction 

A93-14  Winchester,  TX Untimely 

A93-15  Lodi,  TX Withdrawn 

A93-16  Lille.  ME Untimely 

A93-17  Morrison,  lA  Remanded 

A93-18  Gray,  lA Remanded 

A93-19  Cataract,  Wl  Affirmed 

A94-1  Waka,  TX Affirmed 

A94-2  Extension,  LA Affirmed 

A94-3  Inavale.  NE  Affirmed 

A94-4  Boone,  NE  Untimely 

A94-5  Moriah,  NY Withdrawn 

A94-^  Poland,  ME  Affirmed 

A94-7  Holden,  UT Withdrawn 


Response  to  Written  Questions  Submitted  by  the  Subcommittee  on  the 
Postal  Service  to  the  Postal  Rate  Commission 

Question  1.  In  prior  testimony  to  the  Congress,  the  Commission  suggested  a  need 
for  subpoena  authority  due  to  the  great  difficulty  it  experienced  in  getting  requested 
documentation  from  the  Postal  Service.  Has  that  problem  subsided  or  is  it  some- 
thing about  which  the  Commission  remains  concerned? 

Answer.  The  Commission  remains  concerned  that  in  certain  situations  it  is  unable 
to  obtain,  or  unable  to  obtain  in  a  timely  fashion,  information  or  data  it  needs  from 
the  Postal  Service.  A  recent  example  involves  a  Commission  request  for  data  con- 
cerning international  mail  costs  that  the  Postal  Service  has  steadfastly  refused  to 

Question  A.  The  Commission  can  delay  a  rate  decision  while  it  awaits  requested 
documents  from  the  Postal  Service.  Has  the  Postal  Rate  Commission  ever  instituted 
its  statutory  enforcement  provision  by  extending  the  10-month  review  period  by  one 
day  for  each  day  of  unreasonable  delay  by  the  Postal  Service  in  responding  to  a  law- 
ful commission  order?  If  so,  when  and  what  was  the  outcome? 

Answer.  Occasionally  parties  have  raised  the  possibility  of  delasdng  a  decision 
until  tiie  Postal  Service  complies  with  Commission  rulings.  This  potential  sanction 
generally  has  been  effective  in  encouraging  cooperation  from  the  Postal  Service. 
Only  once  has  the  Commission  found  it  necessary  to  invoke  a  day-for-day  extension 
as  allowed  by  39  U.S.C.  §  3624(c)(2).  That  case.  Docket  No.  MC78-1,  was  extended 
by  151  days  because  the  Postal  Service  withdrew  and  changed  significant  portions 
of  its  evidence,  and  refused  to  comply  with  many  Commission  orders  directing  it  to 
provide  essential  information.  When  the  evidentiary  record  was  finally  developed, 
it  revealed  major  flaws  in  the  proposed  rate  and  classification  changes,  and  they 
were  not  recommended. 

Question.  Can  the  Commission  estimate  the  loss  in  revenue  due  to  the  later  im- 
plementation of  that  rate  increase?  Is  that  loss  recoverable  in  the  calculations  for 
Prior  Year  Losses? 

Answer.  The  Commission  can  consider  significant  events  that  occur  aft«r  a  case 
is  filed.  If  new  rates  are  delayed  significantly  because  the  Postal  Service  unreason- 
ably fails  to  comply  with  lawful  Commission  orders,  the  Commission  can  recognize 
the  impact  the  delay  will  have  on  Postal  Service  finances. 

Prior  years'  losses  reflect  the  cumulative  total  operating  experience  of  the  Postal 
Service.  LoKSses  due  to  management's  decision  to  delay  a  request  for  rate  increases 
have  been  treated  no  differently  than  other  losses. 

Question  B.  The  rate-setting  process  is  initiated  by  the  filing  of  the  rate  increase 
by  the  Postal  Service.  The  Postal  Rate  Commission  then  bases  its  rate  determina- 
tion on  the  data  submitted  to  it  by  interested  parties.  When  considering  a  rate  case 
based  on  data  provided  by  the  Postal  Service,  how  has  the  Commission  found  the 
quality  of  data  provided  to  you?  Did  Postal  Service  downsizing  affect  the  quality  of 
data  provided  the  Commission  during  the  recent  rate  case? 

Answer.  In  previous  cases  the  quality  of  the  data  has  been  generally  acceptable 
(the  Bulk  Smsdl  Parcel  Case,  MC93-1,  was  an  exception),  although  the  Commission 
has  always  pointed  out  areas  where  improved  data  or  studies  were  needed.  In  the 
most  recent  case,  R94-1,  the  Commission  and  the  parties  were  hampered  by  an  ap- 
parent lapse  in  the  quality  of  Postal  Service  review  of  its  filing  before  presentation 
to  the  Commission.  "This  problem  occurred  in  cost  presentations  addressing  within 
county  second  class  and  business  reply  mail  (BRMAS)  rates.  In  both  instances  the 
Service  revised  its  proposed  rates  after  probing  by  the  parties  brought  to  Ught  sig- 
nificant overstatement  of  underlying  costs.  For  within  county  (mostly  small  news- 
papers) the  Service  revised  a  proposed  34  percent  increase  to  a  minus  1  percent  in- 
crease and  for  BRMAS  it  proposed  200  percent  increase  which  it  later  revised  to 
a  100  percent.  In  addition.  Commission  investigation  caused  the  Service  to  concede 
that  it  had  overstated  nonmachinable  parcel  post  volume  by  a  factor  of  three,  an 
error  that  could  have  had  serious  implications  regarding  parcel  post  rates.  More- 
over, the  lack  of  studies  concerning  maUer  worksharing  cost  savings  also  con- 
strained the  Commission  and  the  parties  in  considering  changes  in  intra-subclass 
relationships.  Finally,  the  primary  cost  system  for  identifying  responsibihty  for  in- 
facihty  labor  costs,  the  In-Office-Cost-System  (IOCS),  was  seriously  challenged  by 
parties  in  the  R94-1  proceeding.  Those  intervenors  raised  troubling  issues  that  the 
Service  needs  to  address. 

It  is  impossible  for  us  to  say  how  many  of  the  above  data  deficiencies  were  due 
to  the  Postal  Service  downsizing.  However,  the  R94-1  record  showed  that  the  Serv- 
ice had  drastically  reduced  the  number  of  sample  observations  for  many  of  its  ongo- 
ing data  systems.  For  example,  the  number  of  IOCS  observations  was  reduced  by 
nearly  40  percent.  The  Commission  is  concerned  that  these  reductions  in  sample  ob- 


servations,  along  with  the  noted  lack  of  review  before  filing  and  the  lack  of  appro- 
priate studies,  show  a  reduced  commitment  to  providing  the  information  necessary 
to  develop  rational,  cost-based  rates  for  a  $55  billion  public  enterprise  whose  actions 
affect  all  Americans. 

Question  2A.  In  Chairman  Gleiman's  written  testimony,  the  Commission  is  com- 
pared to  a  pubhc  utility  commission  in  terms  of  the  ratemaking  process.  However, 
in  recognition  of  the  increasing  competition  in  the  electric  power  industry,  state 
public  utility  commissions  are  introducing  flexibility  and  streamlining  their  rate- 
making  process.  What  has  the  Commission  done  to  streamline  the  rate  setting  proc- 

Answer.  A  major  function  of  the  Postal  Rate  Commission  is  to  provide  an  open 
public  forum  where  mailers  and  interested  members  of  the  pubhc  can  obtain  infor- 
mation about  the  justification  for  rate  increases,  and  offer  evidence  and  arguments 
in  support  of  modifying  rate  changes  proposed  by  the  Postal  Service.  Since  Congress 
established  the  current  system  of  changing  postal  rates,  the  process  has  become  far 
more  efficient.  These  efficiencies  have  largely  been  directed  toward  increasing  the 

{(ublic's  ability  to  participate  in  a  meaningfiil  way  during  the  10-month  period  al- 
owed  for  rate  decisions. 

The  Commission  has  expanded  the  use  of  written,  as  opposed  to  oral  questioning; 
developed  a  procedure  for  informal  off  the  record  technical  conferences;  eliminated 
the  need  for  administrative  law  judges  issuing  tentative  decisions;  used  prehearing 
conferences  to  identify  issues  and  potential  evidentiary  and  procedural  problems; 
improved  hearing  procedures  to  reduce  the  costs  of  participation  by  interveners;  and 
shortened  the  time  for  Commission  preparation  of  its  written  opinions. 

The  Commission  conducts  a  rule-making  docket  after  every  major  case  to  elicit 
suggestions  for  fiirther  improving  its  procedures.  The  Postal  Service  and  mailers 
have  offered  suggestions  in  these  proceedings  that  have  been  incorporated  into  the 
Commission  rules  of  practice  and  procedure. 

Question  B.  Should  the  Postal  Service  be  allowed  to  experiment  with  new  rates 
and  classifications? 

Answer.  The  Postal  Service  should  be  allowed  to  experiment  with  new  rates  and 
classifications,  and  such  experiments  are  completely  consistent  with  the  existing 
statute  and  appUcable  Commission  procedural  rules. 

A  recurring  criticism  of  the  Postal  Service  has  been  its  failure  to  develop  and  test 
new  rate  designs  and  services.  Experiments  should  help  management  to  develop  ra- 
tional prices,  and  to  test  new  products  inteUigently  and  efficiently.  Experiments  de- 
signed to  be  unlikely  to  do  serious  harm  either  to  the  Postal  Service  or  to  segments 
of  the  public  are  consistent  with  postal  policy. 

Question  C.  What  statutory  changes,  if  any,  would  make  rate  cases  less  expensive 
and  complicated  while  ensuring  that  the  Commission  can  do  its  job? 

Answer.  In  recent  Congresses  several  legislative  proposals  have  surfaced  which 
might  make  rate  cases  less  expensive  and  complicated  without  impeding  the  Com- 
mission. For  example,  during  the  102d  Congress  the  Chairman  and  Ranking  Repub- 
lican Member  of  the  Senate  postal  oversight  subcommittee  introduced  a  series  of 
bills:  S.  946,  to  reduce  the  time  involved  in  a  rate  case  by  one  and  one-half  months 
through  the  elimination  of  some  preliminary  paperwork;  S.  947,  to  give  the  Commis- 
sion the  authority  to  represent  itself  in  court;  S.  948,  to  give  the  Commission  sub- 
poena authority;  and  S.  949,  to  give  the  Commission  final  ratemaking  authority. 

The  single  proposal  most  likely  to  achieve  the  goals  mentioned  in  the  question 
would  be  to  eliminate  the  extensive  proceedings  that  flow  fi"om  the  lack  of  Commis- 
sion final  decision  authority.  Currently  39  U.S.C.  §3625  allows  multiple  requests  for 
reconsideration  from  the  Governors  of  the  Postal  Service  when  they  question  a  Com- 
mission decision.  For  example,  in  March  of  1990,  the  Postal  Service  submitted  an 
omnibus  rate  request  that  was  decided  by  the  Commission  within  10  months.  How- 
ever, the  Governors  of  the  Postal  Service  requested  two  additional  recommended  de- 
cisions from  the  Commission  based  on  the  same  record,  and  this  reconsideration 
process  was  not  complete  until  January  1992,  more  than  12  months  after  the  initial 
Commission  opinion.  This  process  is  time  consuming  and  expensive  for  public  par- 

Another  potential  improvement  would  have  required  the  Postal  Service  to  give  ad- 
vance notice  to  the  public  before  it  submits  a  request  for  rate  changes.  That  pro- 
posed legislation  contemplated  that  the  Postal  Service  would  make  relevant  data 
public  before  filing  its  actual  request,  so  that  mailers  and  the  Commission  could  re- 
view this  material  and  begin  to  evaluate  the  need  for  rate  changes  before  seeing  the 
actual  Postal  Service  proposals.  Having  relevant  information  available  in  advance 
would  shorten  the  time  required  to  evaluate  Postal  Service  requests. 

Question  3A.  Following  the  1990  dispute  over  allocation  of  institutional  costs 
among  mail  classes  with  the  29-cent  stamp,  the  GAO  suggested  that  Congress  con- 


sider  amending  the  nine  ratemaking  criteria  used  for  allocating  overhead  costs  and 
settfngpostal  rates.  In  particular,  GAO  recommended  that  demand  pricing,  which 
considers  tS  "value-of-service"  to  the  sender,  be  given  greater  weight  in  these  cri- 
teria. Although  demand  pricing  is  not  the  only  way  to  address  postal  competition, 
does  the  Commission  believe  tliat  increased  emphasis  on  demand  factors  s  a  nec- 
essary component  of  a  ratemaking  strategy  to  protect  the  long-run  viability  of  the 

"'^Sil'rTt  SmistrbeLes  that  section  3622(b)(2)  requires  it  to  consider 
elasticities  of  demand  among  other  characteristics  of  the  mail  when  setting  rates 
and  it  has  always  given  serious  consideration  to  demand  factors  when  setting  rates. 
The  Postal  Service  provides  and  the  Commission  has  relied  on  extensive  econometnc 
testimony  concerning  volumes  and  own-price  elasticities  of  demand  for  each  of  the 
subclasses  of  mail.  The  Commission  was  given  the  oppori;unity  to  coniment  on  a 
draft  of  the  GAO  study.  The  Commission  identified  senous  techmcal  deficiencies  in 
the  draft,  which  undermined  many  of  its  conclusions.  In  particular,  there  was  a 
complete  absence  of  reUable  estimates  of  the  elasticitv  of  existing  <=^tegmes  of  mail. 
Although  the  Commission's  comments  were  included  as  an  appendix  to  the  study, 
GAO  did  not  refute  those  criticisms  in  the  final  report  xu;«„  f^r. 

The  Commission  recognizes  that  the  Postal  Service  has  significant  competition  for 
many  of  its  subclasses.  Largely  because  of  this,  parcel  post,  for  example,  has  tradi- 
Sonally  had  one  of  the  smallest  aUocations  of  institutional  costs  and  the  allocation 
to  Express  Mail  has  dropped  substantially  over  the  years.  As  a  result  of  this  policy 
botKtelories  combined  make  very  Uttle  contribution  to  overhead  ?ight-tenths  of 
one  percent  of  the  total).  While  the  practice  of  lowering  the  contribution  of  competi- 
JweSses  ?ends  to  preserve  Postal  Service  market  shares,  f  ^^firectly  places  a 
larger  overhead  burden  on  the  monopoly  class  primarily  F^^st  Class)  The  satia- 
tion pori;ion  of  carrier  route  bulk  rate  regular  is  an  impori:ant  exception.  It  make 
a  significant  overhead  contribution,  about  four  percent  of  institutional  costs. 

The  long-run  viability  of  the  Postal  Service  depends  primarily  o^  the  viability  of 
its  bread  and  butter  classes:  First  Class  (including  Priority)  and  third-class  bulk 
regular.  The  former  contributes  76  percent  of  institutional  cost  and  the  latter  1/ 
percent.  The  competitive  categories  are  important  gauges  of  how  the  .Services  cost 
and  quaUty  of  service  compare  to  the  private  sector.  But  ^vith  the  possible  exception 
of  saturation  bulk  rate  regular  and  Priority  Mail,  it  is  hard  to  foresee  a  time  when 
the  competitive  categories  will  make  more  than  a  minor  contribution  to  institutional 
costs.  Obviously  all  sources  of  institutional  cost  contributions  including  the  satura- 
tion category,  are  impori^ant  and  the  Postal  Service  and  the  Rate  Commission  both 
should  attempt  to  preserve  their  contributions.  u  ^  i     „o  o„k 

Recognizing  competitive  subgroups  of  mail  in  the  classification  schedule  as  sub- 
classes or  rate  categories  is  an  important  way  to  deal  with  competition.  Jhis  was 
done  for  example,  in  the  R90-1  rate  case  when  the  Postal  Service  proposed  and  the 
Commission  recommended  a  new  saturation  rate  category  within  bulk  rate  regular 

Question  B.  GAO  suggested  that  Congress  determine  whether  volume  discounts 
proposed  by  the  Postal  Service  would  result,  as  the  PRC  has  ruled  in  undue  or  un- 
reasonable discrimination  among  mailers.  GAO's  report  noted  that  private  earners 
widely  use  volume  discounting  as  a  pricing  strategy,  and  the  inability  to  otter  vol- 
ume discounts  prevents  the  Postal  Service  from  competing  head-to-head  with  l-ed- 
eral  Express  and  United  Parcel  Service  in  the  business-to-busmess  market.  Given 
this  practice's  wide  use  in  the  private  sector,  why  should  volume  discounting  not 
be  used  by  the  Postal  Service?  Would  utilization  of  volume  discounting  represent 
undue  discrimination  against  Service  competitors? 

Answer  In  the  past,  the  Commission  has  rejected  volume  discount  proposals  by 
the  Postal  Service  as  discriminatory  when  evidence  showed  that  the  discounts  were 
unrelated  to  cost  savings  and  would  require  a  small  volume  user  to  pay  a  higher- 
price  for  the  first  unit  purchased  than  a  large  volume  user  would  pay  for  the  tirst 
unit  purchased.  The  joint  task  force  report  (Postal  Ratemaking  in  a  Time  of  Change 
(June  2  1991))  (hereinafter  "Joint  Task  Force  Report")  suggested  that  these  prob- 
lems could  be  avoided  by  dechning  block  discounts  (i.e.,  a  user  would  pay  the  base 
price  for  each  unit  purchased  until  his  volume  exceeded  a  threshold  and  then  ne 
would  pay  a  lower  price  for  each  unit  and  so  on). 

A  major  problem  with  volume  discounts  in  the  competitive  subclasses  ot  mail  is 
that  by  and  large  these  subclasses  make  a  very  small  contribution  to  institutional 
costs.  For  example,  the  average  revenue  per  piece  for  parcel  post  is  $3.65  and  tne 
average  institutional  cost  contribution  per  piece  is  just  25  cents.  The  Postal  Reorga- 
nization Act  prohibits  rates  which  are  below  cost  for  any  subclass  ot  mail,  inus  tor 
the  most  part,  there  is  little  leeway  to  provide  volume  discounts  in  the  compeUtive 
classes  unless  cost  savings  can  be  shown. 


The  issue  of  whether  the  Postal  Service  (which  derives  about  83  percent  of  its  rev- 
enue from  categories  of  mail  reserved  to  it  by  the  monopoly)  should  offer  different 
rates  for  the  same  service  to  mailers  whose  cost  characteristics  are  similar  is  an  im- 
portant one.  Another  issue  is  whether  it  is  fair  for  the  Postal  Service  to  have  the 
preponderance  of  its  overhead  paid  by  monopoly  classes  of  mail  and  at  the  same 
time  offer  services  in  competition  with  the  private  sector  which  make  virtually  no 
contribution  to  institutional  costs. 

Question  C.  Chairman  Gleiman's  written  testimony,  on  page  8,  notes  that  when 
setting  postal  rates,  the  Commission  may  consider  factors  other  than  those  listed 
in  the  law.  Has  the  Commission  developed  other  factors  to  consider?  If  so,  please 
identify  those  factors  for  the  Subcommittee.  If  other  factors  have  not  been  devel- 
oped, please  list  the  rational  for  this  action  for  the  Subcommittee. 

Answer.  Section  3622(b)(9)  allows  the  Commission  to  consider  "such  other  factors 
as  the  Commission  deems  appropriate"  in  developing  recommended  rates.  This  pro- 
vision enables  the  Commission  to  consider  relevant,  innovative  issues  and  argu- 
ments raised  by  the  Postal  Service,  mailers,  and  other  participants  concerned  with 
postal  rates.  This  factor  also  enables  the  Commission  to  recognize  recently  ex- 
pressed national  policies.  For  example,  in  the  1990  omnibus  rate  case,  R90-1,  the 
Commission  found  that  (b)(9)  allowed  it  to  consider  evidence  on  the  environmental 
impact  of  varying  postal  rates. 

Question  4.  During  oral  questions.  Chairman  Gleiman  indicated  the  information 
provided  by  the  Postal  Service  during  the  recent  rate  setting  case  was  deficient  in 
several  instances.  Please  describe  for  the  Subcommittee  the  type  and  nature  of  this 
deficient  data.  How  was  the  deficiency  uncovered? 

Answer.  Please  see  response  to  l.B.  above.  The  deficiencies  were  uncovered  by  the 
scrutiny  given  Postal  Service  proposals  during  the  ratesetting  process.  This  nor- 
mally includes  parties'  discovery.  Commission  information  requests,  technical  con- 
ferences, oral  cross-examination,  and  Commission  questioning  from  the  bench. 

Question.  Had  the  Commission  relied  on  this  deficient  data,  what  woiild  have 
been  the  effect  on  rates? 

Answer.  Rates  for  within  county  second  class  and  BRMAS  would  have  been  sig- 
nificantly higher,  rates  for  parcel  post  would  have  been  too  low  resulting  in  a  reve- 
nue shortage. 

Question.  Does  the  Commission  have  any  recourse  against  the  Service  should  the 
Service  provide  deficient  or  inaccurate  information? 

Answer.  The  natvu-e  of  the  process  dictates  that  almost  all  operational  data  pre- 
sented in  Commission  proceedings  have  to  be  developed  by  the  Postal  Service.  It  is 
the  Postal  Service  that  performs  the  processing,  transportation,  and  deUvery  of  the 
mail.  The  Service  also  collects  data  on  its  operations,  such  as  volume  and  revenue 
information,  for  management  and  control  piirposes.  If  the  Service  does  not  support 
Its  proposals  with  adequate  information  the  Commission  must  reject  those  propos- 
als. In  those  circumstances,  the  Commission  can  recommend  maintenance  of  the  sta- 
tus quo,  or  recommend  a  modification  of  the  proposal  based  on  the  record  of  the 
case.  Unlike  a  pubUc  utility  situation,  the  Commission  may  not  withhold  rate  in- 
creases to  "punish"  the  Postal  Service  for  failure  to  develop  sound  data  because  the 
law  provides  that  rates  should  be  high  enough  to  allow  the  Postal  Service  to  break 

Question  5A.  The  Postal  Service  annual  financial  reports  submitted  to  Congress 
show  that  the  Service's  long-term  debt  has  increased  from  about  $3  bilhon  in  1986 
to  almost  $7.7  billion  in  1994.  The  Act  of  1970,  as  amended,  currently  limits  such 
debt  to  $15  billion.  The  Service's  revenue  has  not  kept  pace  with  its  operating  costs, 
and  the  net  capital  deficiency  (the  cumulative  net  losses  after  all  expenses)  has 
growTi  from  $2.7  bilUon  in  1992  to  about  $6  billion  in  1994.  At  the  same  time,  the 
Service  is  increasingly  constrained  financially  by  requirements  to  fiilly  finance  its 
employee  costs  (including  retirement,  health  care,  etc.)  Fortunately,  economic 
growth  and  the  related  mail  volume  growth  have  allowed  the  Service  to  control 
somewhat  its  operating  deficits  and  hence  its  postage  rate  increases.  What  accounts 
for  this  growth  in  long-term  debt?  Is  the  Commission  concerned  that  the  Service  is 
increasingly  using  deficit  financing,  rather  than  a  pay-as-you-go  approach  through 
adequate  rate  changes,  to  finance  its  operations  and  capital  improvements? 

Answer.  The  Commission  addressed  this  subject  in  its  R94-1  Opinion  and  Rec- 
ommended Decision  (pp.  11-24  11-34).  The  pages  are  attached  to  these  answers  as 
Attachment  A. 

Question  B.  What  would  have  been  the  impact  on  current  postage  rates  today  if 
the  Service  had  experienced  a  zero  mail  volume  growth  in  fiscal  years  1994  and 
1995?  What  would  be  the  price  to  mail  a  less  than  one  ounce  First-Class  letter 


Answer.  Total  mail  volume  grew  3.4  percent  and  First-Class  grew  2.5  percent  in 
FY  1994  and  were  estimated  (by  the  Postal  service  in  testimony  before  the  Commis- 
sion) to  grow  by  .9  percent  and  1.2  percent,  respectively,  in  FY  1995.  Since  increas- 
ing volume  spreads  the  fixed  institutional  cost  of  the  Postal  Service  over  more 
pieces  it  lowers  the  average  rate.  If  the  Service  experienced  no  volume  growth,  the 
average  rate  would  be  higher,  all  other  factors  being  held  constant.  If  the  Commis- 
sion had  assumed  that  First-Class  letter  volume  failed  to  increase  in  FY  1994  and 
FY  1995  the  average  revenue  per  piece  for  First-Class  Mail  would  have  had  to  be 
about  six- tenths  of  one  cent  higher  than  the  34.5  cents  the  Commission  rec- 
ommended, all  other  factors  being  held  constant.  This  may  not  have  affected  the 
rate  for  the  first  ounce  (32  cents),  but  it  could  have  resulted  in  a  higher  post  card 
rate  or  an  increase  in  the  rate  for  additional  ounces. 

Question  6A.  In  a  past  rate  case  the  Commission  explored  the  possibility  ot  a 
"Public  Automation  Rate"  that  woald  be  a  small  discount  from  the  First-Class  rate. 
This  new  rate  could  be  utilized  by  mailers  when  they  utilize  a  machineable  envelope 
of  the  type  provided  with  most  of  our  everyday  household  bills.  This  would  appear 
to  allow  the  regular  household  consumer  to  share  in  the  discount  process  and  en- 
courage the  use  of  these  types  of  pre-addressed  envelopes.  What  is  the  current  sta- 
tus ofthe  "Public  Automation  Rate'? 

Answer.  There  is  no  Public  Automation  Rate,  as  discussed  below,  bmce  the  Lrov- 
emors  have  not  made  such  a  proposal,  none  is  currently  before  the  Commission. 

Question.  Please  explain  how  such  a  rate  would  work.  Does  the  Commission  be- 
lieve it  worthy  of  implementation?  •  t^  i  i. 
Answer.  The  Public  Automation  Rate  recommended  by  the  Commission  in  Docket 
No  R90-1  would  have  worked  as  follows:  To  qualify,  properly  prepared  First-Class 
barcoded  letters  would  have  had  to  be  either  (1)  tendered  in  quantities  of  250  pieces 
or  (2)  contain  a  FIM  mark.  PRC  Op.  R90-1,  V-51  para.  5116  (Footnote  omitted). 
The  Commission  does  believe  it  worthy  of  implementation  so  that  individual  mailers 
may  benefit  from  automation.                                           ,        .      ,                r  ^ 

Question.  Has  the  Postal  Service  postponed  its  consideration  because  of  any  poten- 
tial for  revenue  loss?  ....  ,.  r,  .^  J  i.  4. 
Answer.  The  Governors  initially  accepted  Public  Automation  Rate  under  protest 
and  sought  judicial  review  arguing  that  the  Public  Automation  Rate  was  not  sup- 
ported by  the  record  ofthe  R90-1  proceeding.  Governors  Decision,  January  22,  1991 
at  7-8  The  Governors  then  deleted  the  classification  relating  to  PAR.  Governors  De- 
cision, February  21,  1995  at  6.  1990  was  not  the  first  time  that  the  Commission  rec- 
ommended a  rate  designed  to  allow  individual  mailers  to  benefit  from  automation. 
A  similar  "shell  classification"  was  recommended  in  its  R87-1  decision  This  shell 
classification  was  rejected  by  the  Governors,  (Governors  Decision  at  4.  May  2,  1988) 
and  therefore,  was  not  included  in  their  subsequent  1990  rate  request. 

Question  7A.  According  to  Commission  staff,  there  has  been  a  tremendous  in- 
crease in  the  proportion  of  Postal  Service  mail  processing  activities  associated  with 
nonproductive  time  over  the  last  decade  and  more.  This  time  reportedly  has  in- 
creased to  where  it  is  now  22  percent  of  total  processing  time.  Can  you  explain  how 
"nonproductive"  time  is  defined? 

Answer.  Nonproductive  time  is  the  total  time  associated  with  three  clerk  and 
mailhandler  activities:  (1)  break  time;  (2)  moving  empty  equipment,  and  (3)  clocking 
in  and  clocking  out. 
Question.  How  is  it  used  in  the  rate-setting  process? 

Answer.  It  is  used  in  the  ratesetting  process  as  a  part  of  the  overall  revenue  re- 
quirement of  the  Postal  Service  that  has  to  be  recovered  through  rates. 
Question.  Why  is  nonproductive  time  increasing? 

Answer.  We  do  not  know  why  nonproductive  time  has  been  increasing.  This  was 
a  subject  of  much  debate  in  R90-1.  The  Postal  Service  provided  special  testimony 
addressing  this  which  set  forth  numerous  hypotheses  behind  the  increase  in  non- 
productive time.  . 
Question.  What  is  the  effect  of  this  increase  on  both  rates  and  service.' 
Answer.  The  increase  in  nonproductive  time  has  resulted  in  rates  higher  than 
they  would  have  been  without  the  increase.  We  do  not  know  what  effect  it  has  had 
on  SGrvicG. 

Question  B.  Postal  Service  customers  expressed  concern  about  the  issue  of  non- 
productive time  before  the  Commission  in  the  last  rate  case.  However,  the  Postal 
Service  failed  to  cooperate  with  its  customers  in  providing  information  on  this  sub- 
ject during  that  rule  making.  What,  if  anything,  can  be  done  to  force  the  Postal 
Service  to  comply  with  an  information  request  such  as  this  one  from  customers  dur- 
ing a  rate  case? 

Answer.  Current  law  provides  the  Commission  with  only  one  mechanism  for  re- 
sponding to  Postal  Service  refusals  to  disclose  information  as  directed:  authority 


during  the  course  of  rate  proceedings  to  extend  the  10-month  statutory  deadline  "by 
one  day  for  each  day  of  such  delay."  39  U.S.C.  §  3624(c)(2).  Moreover,  the  (c)(2) 
mechanism  is  only  available  during  a  rate  case,  not  in  classification,  rulemaking  or 
other  Commission  proceedings.  It  would  appear  that  legislation  granting  the  Com- 
mission authority  to  exercise  additional  sanctions  would  help  to  avoid  a  recurrence 
of  this  problem. 

Question  8A.  The  Postmaster  General  has  stated  that  the  Postal  Service  needs 
greater  authority  in  introducing  and  marketing  new  products.  The  Postal  Service 
has  a  number  of  market  research  efforts  underway  that  could  result  in  new  product 
offerings.  For  example,  in  some  areas  of  the  country,  the  Postal  Service  will  be  offer- 
ing what  it  calls  "Fastnet",  which  is  next-day  delivery  of  parcels  ordered  over  inter- 
active television  (the  home  shopping  network).  As  advocated  by  the  Postmaster  Gen- 
eral, should  the  Postal  Service  nave  greater  authority  in  introducing  and  pricing  the 
new  products  and  services?  What  role  does  the  Postal  Rate  Commission  play  in  this 
area,  including  Fastnet? 

Answer.  The  Commission  review  of  classification  and  rate  proposals  for  new  prod- 
ucts was  established  by  Congress  in  the  Postal  Reorganization  Act.  Presumably 
Congress  provided  for  public  proceedings  before  the  Rate  Commission:  ( 1)  because 
the  Postal  Service  has  no  investor  provided  capital,  meaning  virtually  all  the  risk 
in  any  new  postal  service  venture  is  borne  by  monopoly  ratepayers;  and  (2)  because 
it  is  important  that  the  Service's  new  products  do  not  compete  unfairly  in  the  mar- 
ketplace by  having  rates  below  cost. 

The  Commission  is  willing  to  consider  new  procedures  to  make  it  easier  for  the 
Postal  Service  to  introduce  and  price  new  services.  A  proposal  for  this  was  included 
in  the  Joint  Task  Force  Report.  The  Commission's  role  would  be  to  assure  that  tests 
of  new  products,  are  reasonably  designed  to  develop  information  without  competing 

Question  B.  What  experimental  features  does  the  current  law  permit  regarding 
rate-setting  or  reclassification?  Have  these  features  ever  been  used? 

Answer.  The  current  law  does  not  explicitly  address  the  concept  of  "market  experi- 
ments." Any  classification  or  rule  which  "sunsets"  on  a  date  certain  could  be  viewed 
as  experimental.  If  a  proposed  classification  were  to  expire  at  some  time  in  the  near 
fiiture,  it  would  seem  that  the  potential  untoward  consequences  would  be  far  less 
than  if  the  classification  were  permanent  and  the  number  of  issues  which  would 
have  to  be  addressed  should  be  fewer.  The  Commission  has  adopted  rules  for  experi- 
mental classifications.  They  provide  for  Commission  proceedings  to  take  no  more 
than  five  months  when  considering  an  experimental  classification. 

The  Postal  Service  requested  that  these  rules  be  applied  only  once,  in  Docket  No. 
MC86-1,  where  the  Service  proposed  significant  decreases  in  some  parcel  post  rates. 
The  Commission  rejected  the  Service's  proposal  because  it  found  the  rates  to  be 
below  cost  and,  hence,  illegal. 

The  Joint  Task  Force  Report  addressed  the  subject  of  market  experiments  and 
recommended  the  development  of  procedures  for  Commission  review  within  60  days 
of  the  filing  of  the  Postal  Service's  request. 

Question  9A.  Page  3  of  Chairman  Gleiman's  written  testimony  states  that  staffing 
levels  at  the  Commission  are  at  an  historic  low.  Yet,  the  last  rate  case  was  com- 
pleted in  record  time.  Is  the  staffing  level  at  the  Commission  relevant  to  the  time 
it  takes  to  process  a  rate  case? 

Answer.  The  overall  number  of  staff  may  not  be  directly  related  to  the  time  it 
takes  to  process  a  rate  case,  but  having  the  correct  mix  of  staff  in  terms  of  expertise, 
skills,  and  training  is  terribly  important.  It  is  also  important  to  be  able  to  obtain, 
on  an  as  needed  basis,  experts  or  consultants  to  help  with  particular  aspects  of  a 
case.  The  last  rate  case,  R94-1,  was  unusual  in  that  the  number  of  issues  involved 
were  limited,  thereby  reducing  somewhat  the  staff  demands. 

Question  B.  Does  the  Commission  hire  temporary  employees  or  contract  out  work 
dviring  a  rate  case? 

Answer.  Yes.  During  R94-1,  the  Commission  procured  the  services  of  six  consult- 
ants (including  one  procured  by  the  Office  of  the  Consumer  Advocate).  Five  were 
private  sector  experts.  One  was  an  employee  of  the  Bureau  of  the  Census  whose 
services  were  used  on  a  reimbursable  basis.  The  total  cost  for  these  services  was 

Question  10.  Page  4  of  Chairman  Gleiman's  written  testimony  mentions  the  broad 
jurisdiction  the  Commission  exercises  with  regards  to  rate  cases,  reclassification 
proceedings,  and  the  ability  of  rates  to  meet  costs  to  changes  in  service  time.  Is  the 
Commission's  jurisdiction  too  broad?  Should  Congress  consider  restricting  the  juris- 
diction of  the  Commission? 

Answer.  Congress  has,  under  the  Postal  Reorganization  Act,  assigned  many  re- 
sponsibilities to  the  Commission.  In  assigning  these  responsibilities,  however,  it  has 


Koon  rarpfiil  to  assien  a  role  to  the  Commission  only  in  matters  for  which  independ- 

otsZnTlFage  10  of  Chairman  Gleiman's  P^epared  testimony  states  that 
"today  there  are  sfventeen  (17)  subclasses  of  mail.'^  Does  the  number  of  subclasses 
fluctuate?  If  so,  how  recently  has  this  number  changed.'  subclass 

%^IS:'  SliaTthf  Sri'at  Co.n,iss.o„  tSrut?,jXln'fhtrea'?^my' 
its  own  voUtion?  Has  the  Commission  ever  exercised  its  authority  in  this  area,  wny 

";^'sUr.''Yes  it  can  and  yes  it  has.  The  Postal  Reorganiza^ior^Ac^^^^^^^^ 
§3622.,  ^^^^^^^^ZToi^r^i^^  tc^S^l  ^:ft^i^teA?lnsl  ^F'le^s^Tv'e 
rh'ngS^  MC79-J  was  inSerbTcause^f  complaints  by  non  red-tag  mailers  con- 
rprnintr  the  level  of  service  they  received  from  the  Postal  Service. 

O^^ftion  i3  Page  iTof  Chairman  Gleiman's  prepared  testimony  poses  an  excel- 
lent auest"on  regarding  what  we,  as  a  country,  want  and  can  reasonab  y  expect  from 
our  Si  Se^?e  Chairman  Gleiman  queried  whether  we  want  to  hmit  the  focus 
nf  the  Postal  Tei^ce  to  its  traditional  historical  mission,  whether  we  expect  it  to 
nnrinete^thneT  technology,  and  whether  it  could  perform  successful  y  in  new, 
cCm^etfti^  markets.  5^^^^^^^^^^        good  questions-how  would  the  Commission  answer 

^^Slswer  Our  goal  should  be,  as  it  was  in  1970,  to  have  a  postal  system  that  "shall 
havJ  aTi^s  basiffSnction  the  obUgation  to  provide  postal  services  to  bind  the  Nation 
together  through  the  personal,  educational,  literary,  and  business  correspondence  of 
S  people  It  fhall  pr^ovide  prompt,  reUable  and  efficient  ^^J^^.f.^^  Pf^^iTa /^em- 
areas  and  shall  render  postal  services  to  all  communities.  39  U.S.C.  §  l"l|f  ^^^m 
Thasis  added)  We'believ^e  this  means  universal  service  at  ^p"J^fj2"s;'xyce  lo^^^^^^^ 
TV.P  nnnronriateness  of  any  entry  into  new  fields  by  the  Postal  beryice  snouia  oe 
measvJengafnst'whelher'ihat  Sfort  wiU  further  the  ability  of  the  Service  to  meet 

'^oSif  ii'TL"c'omm5fon  is'Ji'a  unique  position  to  hear,  during  a  rate  case, 
from  ofacticallv  e^ryone^involved  with  the  Postal  Service,  customers  and  competi- 
tor? DurinTthe  Sate  case  did  any  particular  testimony  strike  the  Commission 
as  esoeciallv  poignant  or  pertinent  to  today's  business  atmosphere.' 

iSISerThe  Commission  heard  a  great  deal  of  relevant  testimony  dunng  the  last 
ormSbus  rate  case  Identifying  a  few  pieces  of  testimony  in  response  to  your  ques- 
?Si^shoJd  not  ^e  Sd  as  any  indication  that  other  testimony  was  less  helpM. 
'"Testimony  thafcomes  to  mind'as  especially  P^^i-"^  to  today^s^^^^^^^^ 
phere  includes  the  testimony  of  witness  Halstein  .Stralberg  for  Time  Wamer  wno 
Questioned  the  ability  of  the  Postal  Service's  primary  data  system  to  accurately 
?ecord  the  costs  of  its  new  processing  systems,  and  the  testimony  of  witness  William 
I  Henderson,  for  the  Postal  Service,  describing  management's  business  plan. 

aS  example  of  poignant  testimony  would  be  that  of  witness  Richard  C.  Bentley, 
forBrooldl?!  Union  Gas  Company,  expressing  frustration  with  a  flawed  and  mis- 
iSd^g  stu'Jy  reTeS  on  by  the^Pos^^kl  Service  to  propose  a  200  percent  rate  increase 
in  the  business  reolv  rate  paid  by  Brooklyn  Umon  Gas  Company.         ,    ^  .    ., 

q4S  il  men  a  party  wants  to  judicially  appeal  a  rate  case,  what  is  the  pro- 
cpAurpf  Who  defends  the  rate  case  in  court?  , 

AisweV  If  a  maUer  or  a  competitor  wants  to  appeal  a  rate  case  it  must  appea 
thrdeTfsion  of  the  Governors  accepting  the  Commission's  decision  to  a  US.  circuit 
coSrt  of  appeals  Because  the  respondent,  i.e.,  the  Governors,  is  an  establishment 
of  the  Federal  Government,  the  Department  of  Justice  is  responsible  for  defending 
?L  respondent.  TheTpartment  of  Justice  may  authorize  the  Postal  Service  to  pro- 
vide fts'o^  court  defense,  and  it  frequently  issues  7;.Vs%Z%'??509(DC  Ci> 
court  decision.  Mail  Order  Association  of  America  v.  USPS,  986  F.2d  509  (UO.  lav^ 
1993)  held  that  when  the  Postal  Service  does  not  agree  with  an  aspect  of  a  rate 
decision  being  defended  by  the  Department  of  Justice,  it  has  the  right  to  present 
its  separate  position  to  the  court.  If  the  Postal  Service  wishes  it  also  may  file  a  di- 


rect  appeal  of  a  Commission  decision.  Here  again,  the  Department  of  Justice  is  re- 
sponsible for  defending  the  case. 

The  Commission,  thus,  has  no  formal  role  in  the  court  review  process.  Although 
It  is  the  Commission's  Recommended  Decision  that  typically  is  subject  to  challenge, 
the  Governors,  usually  represented  by  Postal  Service  attorneys,  defend  it.  The  Com- 
mission may  attempt  to  prevail  upon  the  Governors'  representative  to  argue  its  posi- 
tion, or  to  persuade  the  Department  of  Justice  to  allow  it  to  submit  an  amicus  cu- 
riae to  the  court. 

Question  16A.  Among  the  Commission's  responsibiUties  is  the  hearing  of  appeals 
regarding  the  closing  or  consolidations  of  Post  Offices.  By  law  a  community  so  im- 
pacted can  file  an  appeal  with  the  Postal  Rate  Commission  and,  in  some  cases,  have 
a  hearing  before  it.  What  is  the  process  for  hearing  appeals  of  proposals  to  close 
or  consolidate  postal  faciUties?  What  are  the  procedures  that  must  be  taken? 

Answer.  Statutory  guidance  for  the  Postal  Rate  Commission  and  the  U.S.  Postal 
Service  concerning  the  closing  or  consolidation  of  post  offices  is  found  in  39  U.S.C. 
§404.  In  1976,  Congress  amended  the  Postal  Reorganization  Act  as  a  consequence 
of  Its  concern  about  the  Postal  Service's  meeting  the  universal  service  obligation 
with  report  to  "regular  and  effective  service"  to  rural  areas.  The  Commission's  proc- 
ess for  reviewing  and  deciding  appeals  is  publicly  available  through  the  Commis- 
sion s  Rules  of  Practice  and  Procedure,  39  C.F.R.  §3001.110  et.  seq.  In  addition, 
^dance  materials  are  sent  to  each  individual  who  files  an  appeal.  In  June  of  1994| 
the  Postal  Service  began  publishing  its  closing  and  consolidation  guideUnes  in  the 
Code  of  Federal  Regulations  39  C.F.R.  Part  241. 

Only  afi;er  the  Postal  Service  issues  a  final  determination  to  close  or  consolidate 
a  postal  facility,  does  the  action  become  appealable  to  the  Commission. 

Upon  receipt  of  an  appeal,  the  Commission's  administrative  office  contacts  the 
Postal  Service  to  confirm  that  indeed  a  particular  post  office  is  the  subject  of  a  final 
determmation.  If  it  is  a  "live"  appeal,  the  Commission  issues  a  notice  requesting  the 
Postal  Service  to  file  the  administrative  record  which  was  the  basis  of  its  decision. 
Upon  receipt  of  the  record,  the  Commission  issues  a  procedural  schedule.  Relevant 
dates  in  the  procedural  schedule  include:  the  deadline  for  a  petitioner's  statement 
(if  any);  the  deadline  for  the  Comments  of  the  Postal  Service;  the  deadUne  for  re- 
questing oral  argument;  the  date  the  record  will  close  and  the  date  by  which  the 
Commission  will  issue  its  decision  (which  is  no  more  than  120  days  aft;er  fihne  of 
the  appeal).  ^ 

Question  B.  What  criteria  does  the  Rate  Commission  utilize  to  determine  these 
appeals  and  to  base  its  decisions  upon? 

Answer  When  considering  an  appealed  Final  Determination,  the  Commission  first 
reviews  the  Record  to  ascertain  if  the  Postal  Service  met  its  obligations  under  the 
previously  mentioned  statutes  and  regulations.  The  Commission  sets  aside  any  deci- 
sion found  to  be  arbitrary,  capricious,  an  abuse  of  discretion,  procedurally  deficient 
or  unsupported  by  substantial  evidence. 

Question  C.  What  are  the  time  requirements  and  the  percentage  of  time  the  Com- 
mission spends  with  these  considerations? 

Answer.  In  FY  1994,  the  Commission  received  14  appeals  from  customers  affected 
by  Post  Office  Closings  and  Final  Determinations.  As  of  April  12,  1995,  the  Commis- 
sion has  docketed  six  of  these  cases  in  FY  95.  Of  the  FY  1994  cases,  the  Commission 
approved  or  "Affirmed"  eight  closings,  "Remanded"  two,  and  "Dismissed"  four  (three 
when  the  Postal  Service  withdrew  its  Final  Determination  and  one  in  which  the  ap- 
pellant did  not  file  the  appeal  in  time).  These  cases  generally  require  approximately 
one  percent  to  2.5  percent  of  the  Commission's  Technical  and  Legal  staff  time.  As 
part  of  Its  ongoing  review  of  opportunities  to  increase  efficiency  and  quality,  the 
Commission  devoted  substantial  energy  in  January  1995  to  streamlining  its  internal 
procedures  for  handling  appeals. 

Question  D.  Please  provide  the  Subcommittee  with  a  listing  of  the  facilities  the 
Postal  Service  has  proposed  to  close  in  the  past  year. 
•  '^^r^®'"'  '^^^  Postal  Service  does  not  report  its  proposed  closings  to  the  Commis- 
sion. The  only  time  the  Commission  formally  becomes  aware  of  a  closing  or  consoli- 
dation IS  when  it  is  appealed.  The  National  League  of  Postmasters  and  the  National 
Association  of  Postmasters  of  the  United  States  have  previously  requested  this  in- 
formation from  the  Commission,  which  suggests  that  the  Postal  Service  has  not 
made  the  information  available  to  those  organizations  either. 

Attachment  B  lists  those  post  office  closings  and  consolidations  which  have  been 
appealed  to  the  Commission  over  the  years.  Although  proposed  closings  are  not  re- 
ported, a  list  of  post  offices  actually  closed  or  consolidated  is  typically  included  in 
the  National  5-Digit  ZIP  Code  and  Post  Office  Directory  (Publication  65). 

Question  17 A.  While  the  Commission  has  jurisdiction  to  hear  appeals  of  proposals 
to  close  or  consolidate  Post  Offices,  do  procedures  exist  for  communities  to  appeal 


^rhen  the  Service  decides  to  convert  a  Post  Office  to  a  Contract  Post  Office?  These 
Contract  Post  Offices  are  administered  by  citizens  under  a  contract  with  the  Postal 
Service.  Do  communities  possess  a  right  of  appeal  should  the  Service  decide  to  close 
1  Contract  Post  Office?  ,^  ^    ,  ■,      r     ^u  i 

Answer  Section  404(b)(1)  of  title  39,  Umted  States  Code,  provides  for  the  appeal 
jf  "the  closing  or  consolidation  of  any  post  office."  The  conversion  of  an  independent 
30st  office  to  a  contract  post  office  is  considered  a  consohdation,  as  the  LPO  becomes 
in  administrative  unit  of  a  different  post  office.  Such  a  conversion  is,  thus,  appeal- 

Tlie  Commission  has  repeatedly  held  that  citizens  affected  by  a  closing  of  a  con- 
tract post  office  also  have  the  right  to  appeal  to  the  Commission  when  that  action 
doses  the  last  facility  serving  a  community.  The  Postal  Service,  disagrees,  arguing 
that  only  decisions  to  close  administrative  units  denominated  as  offices  (this  does 
not  include  CPOs)  can  be  appealed.  It  has  ignored  Commission  decisions  which  were 
inconsistent  with  its  view.  ,      „   ,  .  r         in* 

Question  B.  Does  the  Commission  keep  track  of  the  conversions  of  regular  Post 
Offices  to  Contract  Post  Offices?  ,     .  ,  ,. ,  ^.  , 

Answer.  No.  The  Commission  becomes  involved  in  closings  and  consolidations  only 
when  citizens  appeal.  ,   •  .^      u     i.      • 

Question  18.  The  Subcommittee  has  received  numerous  complaints  about  mis- 
conceptions involving  the  Priority  MaU  service  requirements.  Please  describe  for  the 
Subcommittee  the  differences  between  the  advertised  two-day  priority  mail  and  par- 
cels sent  priority  or  first-class?  ,  .    t^  .     .^    ,,  •,     j     _x-  • 

Answer.  There  were  at  least  two  questions  about  this  Priority  Mail  advertising 
campaign  First,  there  was  a  question  about  whether  the  USPS's  own  service  stand- 
ards called  for  deUvery  of  all  Priority  Mail  in  two  days.  Priority  is  reaUy  just 
"heavy,"  i.e.,  more  than  11  ounces.  First  Class  Mail,  and  First  Class  delivery  stand- 
ards call  for  three-day  delivery  in  some  instances.  Second,  did  the  USPS  meet  the 
two-day  standard?  In  other  words,  was  two-day  deUvery  reliable  enough  to  support 
the  advertising  claims?  Postal  management  ended  the  advertising  campaign  after 
concluding  that  service  did  not  support  the  advertising  claims. 

Question.  What  warrants  the  premium  customers  are  charged  on  these  different 

Answer.  Priority  Mail  and  First  Class  Mail  were  established  to  meet  the  statutory 
requirement  that  the  "Postal  Service  shall  maintain  one  or  more  classes  of  mail  for 
the  transmission  of  letters  sealed  against  inspection.  The  rate  for  each  such  class 
shall  be  uniform  throughout  the  United  States,  its  territories,  and  possessions.  39 
U.S.C.  §  3623(d).  The  "premium"  charged  for  this  mail  should  reflect  better  and 
more  consistent  service  accorded  to  this  maU.  •  u*  i 

Question  19.  Does  the  Commission  beUeve  the  postal  customer  has  the  right  to 
expect  the  Postal  Service  meet  its  service  requirement,  especially  in  those  cir- 
cumstances where  a  customer  is  paying  a  premium  for  improvements  in  mail  han- 
dling? Should  a  postal  customer  have  a  right  to  a  refiind  when  the  Postal  Service 
fails  to  deUver  the  service  for  which  the  customer  has  paid? 

Answer.  Mailers  have  the  right  to  expect  the  Postal  Service  to  meet  its  service 
standards  with  a  high  degree  of  reliability.  One  of  the  criteria  the  Commission  con- 
siders when  establishing  the  "mark-ups"  or  the  contribution  a  class  of  mail  wTdl 
make  to  the  overhead  expenses  of  the  Postal  Service  is  the  "value  of  service  to  the 
sender  and  the  receiver."  The  timeliness  of  deUvery  is  certainly  a  very  important 
component  of  the  Commission's  decisions  on  these  mark-ups. 

The  issue  of  refunds  is  complex.  Administering  such  a  program  would  be  costly, 
and  might  increase  the  price  of  service  to  all  mailers.  Although  there  have  been  oc- 
casional individual  cases  in  which  refunds  have  been  granted.  Express  Mail  is  the 
only  service  that  currently  includes  a  refund  if  there  is  a  failure  to  make  timely  de- 

Question  20.  On  February  28,  1995,  the  House  Treasury-Postal  Appropriations 
Subcommittee  recently  heard  testimony  from  the  Postmaster  General  and  the  Gen- 
eral Accounting  Office  regarding  deUvery  and  service  problems  in  the  Washington, 
D.C.  metropoUtan  area.  Does  the  Rate  Commission  play  any  role  in  enhancing  serv- 
ice and  delivery? 

Answer.  No,  except  to  the  extent  that  classification  changes  enhance  service  or  de- 
Uvery and  rate  increase  recommendations  provide  the  revenue  needed  to  provide 
promised  service. 

Question  21A  The  Postal  Service  has  agreements  with  foreign  countries  for  the 
exchange  of  deUvery  services  within  their  respective  jurisdictions  and  for  reimburse- 
ment of  associated  cost.  In  addition,  the  Service  competes  with  private  deUvery 
firms  for  the  delivery  intemationaUy  of  non-regulated  services,  such  as  parcels  and 
overnight  mail.  These  latter  services  represent  a  growth  opportunity  for  the  Service 


and  private  sector  firms.  What  is  the  Postal  Rate  Commission's  current  role  and 
past  experience  in  regulating  the  Postal  Service's  international  mail  rates? 

Answer.  While  international  mail  may  represent  a  growth  opportunity  for  the 
Postal  Service,  over  the  past  10  years  its  growth  in  volume,  revenue  and  contribu- 
tion to  institutional  costs  has  been  far  less  than  domestic  mail.  In  fact,  since  the 
R84-1  rate  case,  international  mail's  contribution  to  institutional  costs  has  declined 
by  8  percent  in  absolute  terms,  its  contribution  to  institutional  cost  per  piece  has 
declined  by  17  percent,  and  its  share  of  total  institutional  costs  contribution  has  de- 
clined by  55  percent.  These  statistics  can  be  seen  in  the  table  below.  Thus,  when 
singled  out  as  a  separate  product  line,  it  can  hardly  be  said  that  international  mail 
has  been  very  successful  for  the  Postal  Service. 

International  Mail  „       .    ><  , 
Domestic  Mail 

R84-1  R94-1  %  Change  '"'  ^^^"^^ 

Volume  (000) 899,965  990,865  10.10  27.51 

Revenue  ($000) 1,009,200  1,670,598  65.54  91.68 

Revenue  Per  Piece  ($) 1.12  1.69  50.35  50.33 

Contribution  to  Institutional  Costs  ($000)  326,200  298,620  -8.45  103.89 

Contribution  to  Institutional  Cost  Per  Piece  ($)  0.36  0.30  -16.85  59.0 

Share  of  Institutional  Cost  Contribution  3.33%  1.52%  -54.55  1.24 

While  the  Rate  Commission  does  not  set  international  mail  rates,  international 
mail  cost,  volume  and  revenue  data  are  of  significance  to  the  Commission  in  omni- 
bus rate  proceedings.  Domestic  mail  revenue  plus  international  revenues  plus  any 
other  income  must  equal  total  Postal  Service  costs  as  nearly  as  practicable.  Thus, 
if  international  attributable  costs  or  revenues  are  underestimated,  then  domestic 
mail  rates  will  be  set  higher  by  the  Commission  than  they  should  be.  In  previous 
omnibus  rate  fihngs,  the  Postal  Service  has  provided  some  data  concerning  inter- 
national costs,  volumes  and  revenues  as  part  of  its  fiUngs  and  has  responded  to 
questions  concerning  them.  In  fact,  the  cost  of  international  mail  was  an  issue  liti- 
gated in  both  R84-1  and  R90-1. 

In  its  R94-1  fiUng,  the  Postal  Service  eliminated  virtually  all  of  the  data  that  it 
formerly  provided  supporting  its  test  year  forecasts  of  the  costs,  volumes  and  reve- 
nues generated  by  international  mail.  In  its  response  to  discovery  requests,  the 
Postal  Service  took  the  position  that  any  supporting  information  for  its  forecast  of 
total  international  mail  costs,  volumes  and  revenues  is  irrelevant  and  qualifies  for 
trade  secret  privilege.  The  Commission  rejected  the  Postal  Service's  position  that  it 
could  take  upon  itself  the  inherently  judicial  function  of  determining  the  conditions 
under  which  discovery  would  be  available  in  Commission  proceedings,  a  function  re- 
served to  the  Commission  by  39  U.S.C.  §  3624(b)(3).  The  Postal  Service,  however, 
insisted  on  reserving  that  function  to  itself,  and  terminated  its  participation  in  dis- 

The  Commission's  decision  in  the  R94-1  docket  provides  a  ftill  description  of  the 
matter  and  pages  I-25-I-33  are  included  here  as  Attachment  C. 

Question  B.  The  attachment  to  Chairman  Gleiman's  prepared  statement  notes 
that  the  Postal  Service  has  refused  to  provide  the  Commission  with  the  data  needed 
to  determine  how  Service  costs  are  distributed  between  international  mail  and  do- 
mestic mail  service.  How  can  the  Commission  and  Congress  be  assiu-ed  that  the 
Service's  customers  in  the  United  States  do  not  subsidize  its  overseas  customers? 

Answer.  The  attachment  to  Chairman  Gleiman's  prepared  statement  referred  to 
a  letter  from  the  Chairman  and  Ranking  Republican  Member  of  the  Senate  postal 
oversight  subcommittee.  The  letter  requested  the  Commission  to  review  inter- 
national rates  and  reach  conclusions  on  three  points:  (1)  whether  international  rates 
cover  variable  costs;  (2)  whether  nonvariable  costs  exist  which  would  be  attributed 
if  associated  with  domestic  mail;  and  (3)  whether  international  rates  make  an  ap- 
propriate contribution  to  the  Service's  fixed  costs. 

The  Postal  Service  refused  to  provide  the  Commission  with  data  necessary  to  ad- 
dress these  questions. 

It  appears  that  in  the  past,  international  mail  rates  covered  attributable  costs.  We 
used  to  have  reasonable  assiu-ance  of  this  because  the  Postal  Service  provided  sig- 
nificant amounts  of  cost,  volume  and  revenue  data.  Recently  the  Service  stopped 
'^'™?^^"?  ^^^^  ^3^-  As  a  result,  the  Commission  and  the  public  must  now  accept 
on  faith  that  international  mail  is  covering  its  attributable  cost. 

Question  22A.  Current  law  allows  the  Postal  Rate  Commission  the  authority  to 
hear  and  promulgate  reclassification  proposals.  How  does  a  reclassification  case  dif- 
fer from  a  rate  case? 


Answer   As  a  practical  matter,  they  may  be  very  similar.  Reclassification  cases 

''5Sfs^t'D?i\\fMcTft£ough  MC7^5  were  the  last  comprehensive  reclassi- 
firntinn  Droceedines  They  were  completed  in  the  early  iy»u  s.  w^„iri 

fiion  B  What  effect  would  reclassification  have  on  postal  revenues?  Would 
su?h  a  decision  be  revenue  neutral  or  would  postal  rate  payers  see  postal  rates  in- 
crease as  a  result  of  any  reclassification?  ui,^„r,>,  th^  Pn<;tal  Service 

Answer.  Classification  cases  can  change  net  revenues  f/.^ho^S^^^^^^^^^ 
says  the  current  reclassification  request  is  revenue  neutral.  However,  the  i-ostai 
ctprvicp  nroDoses  to  increase  some  rates  and  reduce  others.  ^      r^  ^  ^^^^A 

Sfon23A  In  the  first  general  oversight  hearing,  the  Postmaster  General  told 
the  sSommittee  the  Postal  Service  needs  flexibility  in  the  ratemaking  process  He 
said  pSh^kTdScuS^^^  have  begun  with  the  Commission  to  Pe™;,t  ^^ig^^^ted 
?onsideratTon  of  any  proposed  rate  increase  should  such  an  increase  fall  under  the 
raS  of 'Tation.  Please  describe  for  the  Subcommittee  the  exact  nature  and  scope 

°'lS^weTSe7tt"SSerbe^  meeting  with  the  Postmaster  General  referred  to 
in^SSnanGleiman's  testimony,  the  Chairman  also  met  informally  on  Apnl  3 
1995  wSh  several  Governors.  Discussions  at  these  meetings  have  been  very  general 
'nnat^rvAth  both  sides  expressing  concerns  about  the  ^f  t".5^^tl^^992  Jo  n't 
between  the  two  agencies,  and  reviewing  some  ideas  contained  in  the  1992  Joint 

'^  QuS.  Woufd  any  such  proposals  require  legislative  attention  or  could  it  be 

^Xswe'r'theSSission  does  not  believe  legislation  is  necessary  unless  the  Con- 
ereSSes  to  radically  change  the  nature  of  the  postal  monopoly  and  the  rate- 
mSLrprocess.  As  discussed  above,  we  expect  the  Postal  Service  to  request  a  rule- 
makine  oroceedine  to  address  some  issues  administratively.  4.    u^  ^^ 

Q^ftFonBmit  is  meant  by  Mr.  R^onls  statem^ntthat  the  i^^^^^^^^  be  ex 

pedited  "would  have  to  fall  under  the  rate  of  inflation?  What  is  the  expedited  proce 
Sure  to  be,  i.e.,  would  an  expedited  hearing  be  held  or  no  hearing  at  all? 

Answer  The  Commission  does  not  wish  to  second  guess  what  Mr.  R^nyon  has  in 
mind    One  fom  of  expedited  procedure  was  outUned  in  some  detail  in  the  Joint 

"^tS:  C^'lS^.S^Vat'^iJe^itit^^^  th.  number  of  intervenoi.  in 

'"^^swlritirdYffiSlf  ffU^^^^^  a  process  to  limit  intervenors 

th^woSd  nS  be%en  to  charge's  of  arbitrariness.  Clearly,  if-^.^ave  a  monopdy 
fwhich  we  do)  it  should  be  subject  to  a  regulatory  process  (which  it  is),  and  the  aq 
SSr^tWe  PVocedure  Ac^  proc'ess  is  the  tSted  an^  true  f  ^ans  of  ensunng  femiess 
hi  that  process  If  affected  parties  (potential  intervenors)  are  denied  the  ability  to 
paAicipate'n  the  process,  the  fairness  of  the  process  would  be  seriously  impaired^ 
^qSion  24.  Chairman  Gleiman's  prepared  statement  discusses  the  $6  bUh^^^^ 
negative  equity  of  the  Postal  Service  at  the  close  of  Fiscal  1994  ana  the  atjiuty  oi 
?he  Comm?ssion  to  provide  the  annual  recovery  of  one  Wh  of  accumul^^^^^^ 
Service  losses  each  year.  Please  explain  how  that  $6  bilhon  will  be  apportionea 

"Xywe";'  ^hf  pu^'osf  oflncluding  prior  vear  loss  recovery  in  the  Postal  Service 
revSirrequi^ement  is  ?o  allow  the  Postaf  Service  to  restore  its  equity  (i.e.,  earn 
suSses  eS  to  its  net  cumulative  loss  since  1971)  The  concept  has  been  that 
Ktal  nefciLulative  loss  should  be  made  up  over  the  reasonable  penodo^ 
years.  Hence,  one-ninth  of  the  net  cumulative  loss  is  ^"^luded  in  the  revenue  re 
Quirement  for  this  purpose.  Prior  year  loss  recovery  is  part  of  the  institutional  costs 
SfthrPostal  Service  and  so  it  is  apportioned  to  the  classes  of  mail  in  proportion 
?o  their  institutional  cost  contribution.  Listed  below  are  the  subclasses  o^  mail  and 
their  share  of  institutional  costs  assigned  by  the  Commission  in  K94-1. 

Contribution  to  Institutional  Cost 

First-Class  Mail: 



Contribution  to  Institutional  Cost — Continued 


Cards  1.2 

Total  First  Class  69.9 

Priority  Mail  6.9 

Express  Mail  0.6 

Mailgrams * 

Second-Class  Mail: 

Within  County  * 

Nonprofit  0.1 

Classroom  * 

Regular  Rate 1.1 

Total  Second  Class 1.2 

Third-Class  Mail: 

Single  Piece  0.1 

Bulk  Rate  Regular  17.0 

Bulk  Rate  Nonprofit 0.6 

Total  Third  Class  17.7 

Fourth-Class  Mail: 

Parcel  Post 0.2 

Bound  Printed  Matter 0.5 

Special  Rate  0.1 

Library  Rate  * 

Total  Fourth  Class  0.8 

Free-for-the-Blind  Mail  -0.2 

International  Mail  1.5 

Special  Services 2.0 

Total  Mail  &  Services  100.0 

'Less  than  0.05  percent. 

Question  25.  How  quickly  would  the  Postal  Service  have  to  request  a  rate  increase 
in  the  event  Congress  were  to  pass  or  enact  the  "prefund"  revenue  option?  Would 
all  types  of  mail  be  affected? 

Answer.  This  is  a  difficult  question  which  turns  on  how  the  Postal  Service  man- 
ages its  cash  position  which  is,  of  course,  affected  by  both  costs  and  revenues.  The 
responsibility  for  deciding  when  to  request  a  rate  increase  rests  with  the  Postal 
Service  Governors.  Costs  such  as  the  "prefund"  option  charged  to  the  Postal  Service 
would  eventually  have  to  be  recovered  through  rates,  and  those  rates  would  be  high- 
er as  a  result  of  the  charged  costs.  We  would  expect  that  enactment  of  a  "prefund" 
revenue  option  wovild  accelerate  the  next  request  for  a  rate  increase,  and,  would  af- 
fect all  classes  of  mail  and  types  of  services. 

Question  26.  Postmaster  Cfeneral  Runyon,  in  testifying  before  this  subcommittee 
last  month  stated,  "we  can  simplify  the  rate-setting  process  while  maintaining  ap- 
propriate oversight,  and  make  it  faster  and  much  less  expensive."  What  is  your  re- 
action to  that  statement?  How  would  the  rate  setting  process  change  in  order  to  ac- 
commodate Mr.  Runyon's  wishes? 

Answer.  We  would  again  refer  the  Subcommittee  to  the  Joint  Task  Force  Report 
(June  1,  1992)  which  sets  forth  several  proposals  for  simplif)dng  the  rate-setting 

Question  27.  The  Postmaster  General  argues  that  without  the  cumbersome  and 
inflexible  ratemaking  process,  he  could  respond  to  market  forces  and  be  more  com- 
petitive. Identify  all  areas  where  the  Postal  Service  already  has  that  freedom?  How 
is  the  Postal  Service  doing  in  those  areas? 

Answer.  International  Mail  is  the  only  category  for  which  the  Postal  service  can 
set  its  rates  unilaterally,  i.e.,  without  having  to  follow  the  ratemaking  procedures 
prescribed  in  chapter  36,  of  title  39,  United  States  Code.  Please  see  the  response 
to  question  21  for  a  discussion  of  the  Service's  experience  with  international  mail. 

Question  28.  Is  there  any  way  to  make  rate  cases  less  expensive  and  less  com- 

Answer.  Please  see  the  response  to  question  2.C.,  above.  Also,  the  Joint  Task 
Force  Report  (June  1,  1992)  sets  forth  several  proposals  for  making  certain  aspects 


of  rate  cases  less  expensive  and  less  complicated.  The  challenge  is  to  balance  the 
need  to  allow  interested  parties  to  effectively  present  their  views  while  reducing  ex- 
pense and  complexity.  As  Chairman  Gleiman  pointed  during  in  his  testimony,  while 
any  existing  process  can  be  improved,  the  current  process  does  work  very  well 

Question  29  On  page  six  of  your  testimony,  you  mentioned  that  the  Postal  bemce 
does  not  use  postal  rate  increases  to  retire  debt,  instead  management  applies  the 
money  to  meet  operating  expenses.  What  should  be  done  about  this  practice? 

Answer.  The  Commission  has  included  a  prior  year  loss  (PYL)  recovery  in  the  rev- 
enue requirement  for  each  omnibus  rate  proceeding  since  R76-1.  These  funds  have 
been  requested  by  the  Postal  Service  each  time  for  the  purpose  of  making  up  tor 
its  cumulative  losses  since  1971.  Technically  their  purpose  is  to  restore  Postal  Serv- 
ice equity  which  now  stands  at  about  negative  $6  billion  When  the  Commission 
first  included  prior  year  losses  in  R76-1,  the  Postal  Service's  equity  was  about  nega- 
tive $1  bilUon.  Thus,  Postal  Service  equity  has  deteriorated  substantially  in  spite 
of  receiving  prior  year  loss  recovery  revenues  regularly,  and  m  spite  ot  a  one-time 
$1  bilUon  congressional  contribution  under  PubUc  Law  94^21. 

Failure  to  restore  equity  comes  about  because  the  Service  fails  to  request  enough 
revenue  in  its  filings  with  the  Commission,  or  because  the  Postal  Service  waits  too 
long  to  file  a  new  rate  case  allowing  its  net  income  to  become  negative.  When  Postal 
Sendee  management  receives  funds  to  restore  equity,  judicial  precedent  gives  it  sole 
discretion  with  respect  to  how,  in  fact,  those  funds  are  used.  When  Postal  Service 
management  fails  to  use  prior  year  loss  funds  to  repay  past  losses,  ratepayers  wind 
up  paying  for  the  same  losses  over  and  over  again.  Ratepayers  wind  up  paying  tor 
the  same  losses  over  and  over  again.  Because  First-Class  Mail  users  pay  a  dis- 
proportionate share  of  prior  year  loss  recovery  revenues  and  because  management 
uses  these  PYL  for  normal  operations,  First-Class  MaU  users  wind  up  paying  more 
than  they  would  have,  had  the  Service  requested  ordinary  operating  funds  Ihe 
Commission  has  repeatedly  expressed  its  concern  in  this  regard,  bee  e.g.,  PKU  up. 
90-1  (Joint  Concurring  Opinion),  attached  as  Attachment  D-  j    «•    4. 

The  issues  of  the  Service's  substantial  negative  equity  and  the  untoward  etlects 
it  is  having  on  the  Postal  Service  and  the  Postal  Reorganization  Act  are  addressed 
in  the  Commission's  R94-1  decision  and  included  here  as  Attachment  A. 

The  way  to  ensure  the  use  of  prior  year  loss  recovery  for  its  intended  purpose  is 
for  postal  management  to  resolve  to  use  those  funds  for  their  intended  purpose. 

Question  30.  On  page  nine  of  your  testimony,  you  discussed  your  dissatisfaction 
with  the  quality  and  quantity  of  information  presented  by  the  Postal  Service,  in 
vour  opinion,  has  the  reduction  of  resources  devoted  to  data  collection  and  analysis 
been  most  attributable  to  the  1992  reorganization?  If  not,  to  what  do  you  attribute 
the  decline? 

Answer.  Please  see  response  to  question  l.B.  above.  ,        _  j    ^    • 

Question.  What  specifically  should  the  Postal  Service  and  or  Congress  do  to  im- 
prove the  quality  of  data?  ,   ,         ,        ,  •  n  u « 

Answer  We  beUeve  the  both  Postal  Service  and  the  ratemaking  process  wU  bene- 
fit if  the  Postal  Service  devotes  more  resources  to  developing  operational  and  costing 
data.  This  information  is  critical  to  the  ratemaking  process.  It  is  also  valuable  to 
postal  ofiicials  in  their  efforts  to  manage  the  Postal  Service.  We  understand  the 
Subcommittee,  in  exercising  its  oversight  authority,  has  asked  the  General  Account- 
ing Office  to  look  into  the  data  situation.  We  welcome  this  inquiry,  and  applaud  the 

Subcommittee  for  initiating  it.  ,    .  ^  ^1    ,.    ^r  a  +i,„+  «^,„. 

Question  31.  The  Chairman  of  the  Board  of  Governors  recently  testified  that,  our 
negative  equity  is  due,  in  very  large  part,  to  the  failure  of  the  Congress  to  ftiUy  fund 
revenue  foregone  and  imposing  the  OBRAs  on  us."  Do  you  agree  with  his  statement.' 
If  not,  why  not  and  should  the  Postal  Service  be  concerned  about  their  negative  eq- 
uity of  $6  billion?  .,    J     1       V    IJ-         J  ^+0 

Answer.  First,  losses  can  be  mitigated,  or  even  avoided,  by  holding  down  costs. 

Prior  to  the  1986  OBRA  (which  was  the  first  to  affect  the  Postal  Service),  the 
Postal  Service  had  net  cumulative  losses  of  more  than  $2.5  billion.  Consequently, 
virtually  all  of  its  $3  billion  in  equity  had  been  dissipated  by  that  time.  Unquestion- 
ably OBRAs  and  congressional  failure  to  fund  revenue  forgone  placed  an  additional 
financial  burden  on  the  Postal  Service.  We  do  not  agree,  however,  that  this  has  been 
the  cause  of  the  current  $6  billion  in  negative  equity.  The  Postal  Reorganization  Act 
calls  on  the  Postal  Service  Governors  to  establish  rates  and  fees  so  that  the  total 
estimated  income  and  appropriations  to  the  Postal  Service  will  equal  as  nearly  as 
practicable  total  estimated  costs  of  the  Postal  Service."  39  U.S.C.  §3621.  Thus,  it 
is  the  responsibility  of  the  Governors  and  the  management  they  supervise  to  break 
even.  The  statute  also  provides  that  only  the  Board  of  Governors  can  authorize  a 
rate  fifing.  When  expenses  increase  and  income  decreases,  it  is  the  Board  of  Gov- 


emors'  responsibility  to  request  rate  increases  so  that  the  Postal  Service  breaks 

OBRAs  cause  expenses  to  increase  as  do  new  labor  contracts,  CPI  increases  and 
fuel  cost  increases.  Failure  to  appropriate  revenue  forgone  causes  income  to  decline 
just  as  falling  parcel  post  volumes  do.  Expenses  and  revenues  from  all  sources  must 
be  considered  by  the  Board  of  Governors  in  carrying  out  its  obligations  under  the 
Postal  Reorganization  Act. 

The  decrease  in  Postal  Service  equity  came  about  because  the  Board  did  not  ask 
for  new  revenues  in  a  timely  manner.  For  example,  the  Postal  Service  maintained 
its  R90-1  rates  for  an  unprecedented  four  years  in  spite  of  losses  every  year  in 
which  the  rates  were  in  effect.  An  additional  problem  was  that  the  Service  under- 
estimated its  expenses  when  it  did  file  for  increased  revenue. 

Attachment  A— Docket  No.  R94-1 


1.  Current  Equity  of  the  U.S.  Postal  Service 

[2072]  The  equity  of  the  U.S.  Postal  Service  represents  the  amount  by  which  its 
assets  exceed  its  liabilities  and  consists  of  two  component  elements-;-HContributed 
capital  and  net  operating  results.  Since  the  Service  is  in  a  deficit  condition,  the  net 
operating  results  reflect  a  net  cumulative  loss.  Table  II-2  summarizes  operations 
since  inception  and  the  impact  thereof  on  equity. 

[2073]  Contributed  Capital.  The  Postal  Service  began  its  operations  as  an  inde- 
pendent agency  on  July  1,  1971,  with  an  equity  of  $1,686  billion  representing  the 
book  value  of  assets  transferred  from  the  Federal  Government.  Public  Law  No.  94- 
421  transferred  $1  billion  of  additional  cash  capital  diuing  the  two-year  period  end- 
ing September  30,  1977.  Miscellaneous  additions  reflecting  property  transfers 
brought  the  contributed  capital  up  to  a  total  of  $3,034  billion  as  of  September  30, 

[2074]  Net  Loss.  During  17  years  of  operations  for  the  period  of  FY  1972  through 
FY  1994,  the  Postal  Service  has  sustained  losses  totaling  $11,811  billion,  reflecting 
the  amounts  by  which  expenses  exceeded  revenues  for  the  indicated  periods. 

[2075]  Recovered  PYL.  RPYL  represents  net  income  earned  during  the  transition 
quarter  and  for  the  FYs  1979,  1982,  1983,  1984,  1986  and  1989.  The  reported  net 
incomes  resulted  from  the  fact  that  revenue  for  the  indicated  periods  exceeded  ex- 
penses by  a  total  of  $2,386  billion  as  of  September  30,  1993.  This  net  income  reduces 
the  net  ciunulative  losses  to  $9,425  billion  for  the  23  years  since  September  30, 
1994.  Cumulative  net  losses  are  displayed  in  Figure  II- 1. 


Docket  No.  R94-1 
































Table  11-2— COMPONENT  ELEMENTS  OF  USPS  EQUITY  FY  1972-FY  1995 

($  In  Thousands) 

Recovered  PYL 

Net  Cumulative 

Contributed  Cap- 


Beginning  Balance: 














































































































Actual  Total  Through  FY  93 
1994  2 








2.385.587         (9.425.484) 


'Equity  =  Net  Cumulative  Loss  +  Contributed  Capital. 
2  According  to  USPS  8A  v»ltness  Ward. 

[2076]  Equity.  The  initial  positive  equity  of  $1,686  billion  has  eroded  to  a  nega- 
tive balance  of  $6,391  billion  as  of  September  30,  1994,  as  projected  in  witness 
Ward's  testimony.  USPS-T-8  Exhibit  8A.  During  the  test  year,  it  will  improve  by 
the  anticipated  RPYL  of  $935,400  million  to  a  balance  of  $5,456  billion  as  of  Sep- 
tember 30,  1995,  if  the  new  rates  are  implemented  October  1,  1994.  See  Tr.  5/1551- 

[2077]  However,  witness  Ward  stated  that  the  anticipated  implementation  date  of 
February  1,  1995  instead  of  October  1,  1994  would  reduce  the  TYAR  revenue  by 
$1,592  billion.  Id.  at  1549.  This  revenue  reduction  will  place  the  $936  million  RPYL 
in  jeopardy  for  FY  1995. 

[2078]  The  net  cumulative  loss  of  $9,425  billion  through  FY  1994,  and  the  result- 
ing $6,391  billion  in  negative  Postal  Service  equity,  is  caused  by  a  combination  of 
inadequate  revenues  and  excessive  and/or  unanticipated  costs.  The  most  severe  drop 
in  the  Postal  Service's  equity  occurred  between  FY  1991-FY  1993  when  the  extraor- 
dinary costs  related  to  the  Omnibus  Budget  Reconciliation  Acts  (OBRAs)  of  1991 
and  1993,  restructuring,  and  debt  refinancing  were  incurred.  The  ciunulative  net 
loss  over  this  period  was  $3.8  billion.  During  oral  cross-examination  witness  Porras 
addressed  the  impact  of  these  three  extraordinary  events.  He  states  that  in  1991 
the  Postal  Service  had  expected  to  make  $400  million  in  net  income  but  instead  in- 
curred a  loss  of  $1.5  billion  because  of  OBRA.  In  1992,  it  anticipated  a  net  income 
of  over  $400  million,  but  the  decision  to  restructure  its  workforce  resulted  in  a  loss 
of  $536  million.  In  1993,  the  Postal  Service  anticipated  breaking  even,  but  because 
of  revenue  forgone  shortfalls,  OBRA  interest  expense,  and  management's  decision 
to  refinance  debt,  it  ended  with  a  $1.8  billion  loss.  Tr.  24/11299-301. 

[2079]  Extraordinary  items  of  these  magnitudes  do  indeed  contribute  to  net  losses 
and  subsequent  erosion  of  equity.  However,  the  effect  of  the  1991  OBRA  was  some- 
what mitigated  by  the  additional  $234  million  a  year  built  into  the  rates  when  the 
Postal  Rate  Commission  (PRO  raised  the  RPYL  requested  in  Docket  No.  R90-1 
from  $236  million  to  $470  million,  specifically  because  of  OBRA.  The  restructuring 
and  the  debt  refinancing  in  1992  and  1993  were  both  management  decisions,  which 


may  or  may  not  prove  to  be  cost  effective  in  the  long  run.  However,  the  Postal  Serv- 
ice's decision  not  to  file  a  request  for  new  rates  in  1993  resulted  in  the  estimated 
$1.3  billion  loss  in  FY  1994.  An  earlier  filing  could  have  alleviated  the  Postal  Serv- 
ice's financial  stress  by  providing  a  cash  infusion  through  increased  revenue.  In  the 
period  between  September  30,  1990  and  September  30,  1993,  the  Postal  Service  in- 
creased its  long-term  debt  by  almost  $3  billion  from  $6,971  billion  to  $9,748  billion. 
Had  it  increased  rates  sooner,  borrowing  for  capital  investments  could  have  been 
smaller,  because  more  cash  from  operations  would  have  been  available.  Whether  the 
benefits  of  maintaining  rate  stability  for  an  additional  year  outweigh  the  con- 
sequences of  increased  debt  and  the  erosion  of  equity  in  FY  1994  is  a  matter  of  con- 

2.  The  Relationship  of  Long  Term  Debt  and  Equity 

[2080]  According  to  UPS  witness  Geddes  "the  indebtedness  of  the  Postal  Service 
must  inevitably  increase  as  its  negative  equity  position  grows  worse."  Tr.  14A/6733. 
He  contends  that  because  the  Postal  Service  no  longer  has  an  equity  cushion  to  fund 
losses,  it  must  be  funding  them  with  long-term  debt.^^  Witness  Geddes  dem- 
onstrates a  strong  relationship  between  the  Postal  Service's  cumulative  losses  and 
its  debt.  As  he  states,  the  correlation  of  long-term  debt  and  cumulative  losses  is  siu*- 
prisingly  high.  He  also  shows  that  in  the  past  10  years  the  Postal  Service's  debt 
to  asset  ratio  has  increased  from  12  percent  to  43  percent.  During  this  period,  he 
states,  "the  level  of  debt  has  increased  almost  eight-fold  and  the  net  capital  defi- 
ciency has  skyrocketed."  Id.  at  6737-38. 

[2081]  The  Postal  Service  claims  that  over  the  last  17  years  it  has  been  able  to 
avoid  borrowing  to  fund  losses.  Tr.  24/11252.  Instead,  the  Service  claims  that  it  has 
borrowed  to  fund  capital  investments.  Id.  at  11260.  Figure  II-2  has  been  developed 
by  the  Commission  to  show  cumulative  losses,  capital  procurement,  and  long-term 
debt.  It  can  be  seen  that  debt  and  operating  losses  are  closely  associated,  and  that 
operating  losses  are  indeed  an  important  reason  for  the  Postal  Service's  accumula- 
tion of  long-term  debt.  Sustained  operating  losses,  and  consequent  prolonged  dete- 
rioration of  equity,  reduces  the  cash  available  from  operations  that  could  be  used 
to  fund  capital  investments.  This  creates  the  need  to  increase  long-term  debt. 

23  In  a  presentation  by  the  Postal  Service's  Chief  Financial  Officer  Michael  Riley  at  the  Sep- 
tember, 1994  Board  of  Governors'  meeting,  Riley  stated  that  short-term  debt  is  also  an  impor- 
tant component  of  the  Postal  Service's  cash-management  policy.  While  short-term  debt  can  be 
continuously  rolled-forward  to  become,  in  effect,  long-term  debt,  there  is  no  evidence  that  the 
Postal  Service  is  currently  doing  this. 


Docket  No.  R94-1 
























































3.  Expectations  of  Break-Even  Operations 

[2082]  From  the  outset,  the  newly  independent  Postal  Service  was  expected  to  op- 
erate on  a  business-Uke  basis.  This  implied  many  changes  from  the  way  the  old  Post 
Office  Department  operated.  From  a  financial  standpoint,  it  meant  that  the  Service 
was  to  be  operated  on  a  break-even  basis.  A  major  complaint  about  the  old  Post  Of- 
fice Department  was  that  it  ran  perpetual  deficits  whicn  were  fiinded  by  taxpayers. 
The  Report  of  the  President's  Commission  on  Postal  Organization  (known  as  the 
Kappel  Commission)  in  June  1968,  made  a  series  of  recommendations  which  ulti- 
mately led  to  the  Postal  Reorganization  Act  of  1970.  Its  first  recommendation  was, 
"[w]e  recommend  that  a  postal  corporation  owned  entirely  by  the  Federal  Govern- 
ment be  chartered  by  Congress  to  operate  the  Postal  Service  of  the  United  States 
on  a  self-supporting  basis."  Toward  Postal  Excellence,  The  Report  of  the  President's 
Commission  on  Postal  Organization,  June  1968  at  55.  The  Postal  Reform  and  Salary 
Adjustment  Act  of  1970  expUcitly  stated  that: 

The  Postal  Service  Authority  is  to  become  self-sustaining — eliminating  the 
postal  deficit — by  January  1,  1978.  Rates  are  to  be  set  so  that  .  .  .  revenue  .  .  . 
as  a  whole  meet  its  expenses,  taking  into  account  appropriations  that  the  Con- 
gress may  choose  to  make  to  cover  the  loss  of  revenues  on  free  or  reduced  rate 
maU.  (H.R.  Rep.  No.  988,  91st  Cong.,  2d  Sess.  at  6  (1970). 
[2083]  Clearly,  Congress  did  not  intend  for  the  Postal  Service,  24  years  later,  to 
have  ciunulative  net  losses  of  more  than  $9,425  bilhon  and  negative  equity  of  more 
than  $6,391  billion.  It  intended  the  Postal  Service  to  operate  on  a  break-even  basis: 
"To  meet  the  costs  of  maintaining  a  nationwide  mail  system  we  need  .  .  .  rates 
which  appropriately  cover  the  costs  of  the  system".  116  Cong.  Rec.  22,050  (1970)  (re- 
marks of  Sen.  BeUmon).  A  decade  later  the  Court  of  Appeals  for  the  District  of  Co- 
lumbia stated: 

Operating  deficits  have  plagued  the  Postal  Service  for  decades.  The  Act  was 
passed  to  solve  this  problem,  but  unfortunately  the  Act's  goals  have  failed  to 
reach  ftniition.  The  Postal  Service  has  continued  to  incur  operating  losses.  It  has 
attempted  to  offset  these  losses  by  drawing  down  working  capital,  incurring 
debt,  reducing  services,  and  increasing  rates.  (Footnotes  omitted) 
National  Association  of  Greeting  Card  Publishers  v.  U.S.  Postal  Service,  607  F.2d 
392,  426  (D.C.  Cir.  1979),  cert,  denied,  444  U.S.  1025  (1980). 

[2084]  Section  3621  of  the  Postal  Reorganization  Act  calls  on  the  Postal  Service 
to  file  rate  increases  with  this  Commission  that  will  allow  revenues  to  match  total 
estimated  expenses  as  nearly  as  practicable.  In  the  narrow  sense  of  this  section,  the 
estimates  of  costs  furnished  by  the  Service  for  a  test  year  must  be  matched  by  Com- 
mission estimates  of  revenue  for  that  test  year.  In  the  broader  sense,  however,  it 
is  clear  that  Congress  ejcpected  the  Service  to  breakeven  over  time.  This  it  has  failed 
to  do.  Instead,  it  has  had  operating  deficits  in  17  of  its  24  years. 

4.  Consequences  of  Chronic  Deficits 

[2085]  Because  of  the  chronic  stream  of  operating  losses  and  the  consequent  ero- 
sion of  its  equity,  the  Service  has  failed  to  meet  the  financial  goals  expected  of  it. 
Instead  of  operating  like  a  business,  it  is  dependent  on  its  ability  to  borrow  in  order 
to  fund  $9,425  billion  of  cumulative  losses.  In  the  world  of  private  industry  cumu- 
lative losses  and  the  negative  equity  of  the  magnitude  the  Postal  Service  has  in- 
curred would  spell  financial  disaster.  It  would  result  in  the  inability  to  borrow,  the 
loss  of  suppUers,  who  would  fear  a  company  in  such  financial  straits  would  not  be 
able  to  make  payments,  the  loss  of  business  contracts  due  to  the  inability,  real  or 
perceived,  to  complete  jobs,  and  the  severe  restriction  of  capital  projects.  Severe  eq- 
uity erosion  would  eventually  lead  to  a  state  of  bankruptcy.  According  to  the  Postal 
Service's  own  witness  Ward,  if  the  PostalService  were  a  conventional  business  oper- 
ation, it  would  be  bankrupt.  Tr.  5/2396.  The  Service  would  not  have  been  able  to 
survive  without  the  $15  billion  line  of  credit  afforded  it  by  statute.  It  is  only  because 
the  U.S.  taxpayers  ultimately  stand  responsible  for  its  debt,  that  the  Postal  Service, 
with  its  large  negative  equity,  is  able  to  borrow  at  all. 

[2086]  This  unique  borrowing  capability  is  one  of  the  reasons  the  Postal  Service 
is  able  to  continue  as  a  "going  concern"  despite  the  dismal  state  of  its  balance  sheet. , 
The  other  reason  is  the  huge  cash-generating  account  balances,  such  as  depreciation 
and  workers'  compensation.  These  accounts  are  accrued  in  the  current  period  for  ex- 
penses, which  require  no  cash  outlays  until  subsequent  periods.  This,  in  effect,  low- 
ers the  Postal  Service's  bottom  fine  without  lowering  its  cash  balance  until  the  dis- 
bursements are  actually  made. 

[2087]  This  method  of  operation  cannot  continue  indefinitely.  Postal  Service  rebut- 
tal witness  Richard  Porras  indicates  that  over  time,  the  accrued  "non-cash"  ex- 
penses on  which  the  Postal  Service  has  been  relying  for  operating  cash  may  be  in- 
sufficient to  meet  the  liabilities  that  will  finally  become  due.  Tr.  24/11346.  In  an 


organization  such  as  the  Postal  Service,  in  which  the  biweekly  payroll  exceeds  $1 
billion,  this  situation  would  be  disastrous.  The  Postal  Service  would  need  an  imme- 
diate and  substantial  infusion  of  cash.  Presumably,  it  would  need  to  borrow  the  nec- 
essary funds.  While  the  Postal  Service  is  allowed  under  the  Postal  Reorganization 
Act  of  1970  to  borrow  up  to  $1  billion  for  operating  purposes  annually,  that  amount 
would  not  even  cover  one  payroll.  The  Postal  Service  could  find  itself  in  serious  fi- 
nancial trouble.  As  witness  Porras  states,  "we  need  to  address  this  negative  equity 
and  we  need  to  look  at  the  future  of  the  organization  and  I'm  very  concerned.  When 
those  liabilities  become  due,  we  need  to  have  the  cash  resources  to  pay  for  that  or 
the  assets  to  pay  for  those."  Id.  at  11347. 

[2088]  Postal  Service  management  is  under  great  pressure  from  current  postal 
users  to  hold  rates  down.  If  management  responds  by  holding  rates  below  costs, 
then  current  users  fail  to  pay  the  mil  costs  of  operating  the  Postal  Service.  Debt 
is  incurred  to  fund  operating  losses.  This  debt  must  eventually  be  paid  off,  which 
means  that  future  users  of  the  Postal  Service  will  subsidize  current  users  by  paying 
first  the  interest  on  the  debt,  and  then  the  principal.  If  the  Service  winds  up  in  a 
position  where  it  cannot  reasonably  repay  its  debt,  then  future  taxpa)dng  citizens 
of  the  United  States  will  wind  up  subsidizing  current  users  of  the  Postal  Service. 

[2089]  Chronic  operating  losses  also  mean  that  the  Postal  Service  is  charging 
rates  which  are  lower  than  cost.  The  Postal  Service  is  competing  with  firms  in  the 
private  sector,  which  cannot  afford  to  run  continued  operating  losses.  Consequently, 
the  Postal  Service  appears  to  have  an  unfair  advantage  over  these  firms.  As  pointed 
out  by  UPS,  "[t]he  act  also  requires  the  Postal  Service  to  compete  fairly."  UPS  Brief 
at  6-7.  Charging  rates  which  do  not  cover  costs  is  inconsistent  with  this  require- 

[2090]  Another  reason  for  avoiding  chronic  operating  deficits  is  their  tendency  to 
lead  to  inefficient  operations.  The  need  to  avoid  exacerbating  an  already  poor  finan- 
cial situation  may  cause  the  underfiinding  of  needed  activities  such  as  maintenance, 
new  programs,  and  capital  expenditiu-es.  Chronic  deficits  tend  to  eliminate  the  oper- 
ating flexibility  that  a  well-run  business  must  have.  As  the  Report  of  the  President's 
Commission  on  Postal  Reorganization  stated,  "[t]he  [Postal]  corporation  should  be 
self-supporting  because:  subjecting  a  business  activity  to  deficit  financing  stifles 
management  initiatives  and  practically  guarantees  inefficient  operation  .  .  ."  To- 
ward Postal  Excellence  at  57.  In  the  event  that  volume  growth  stops  or  slows  pre- 
cipitously, large  negative  equity  may  mean  that  the  Service  lacks  the  financial  re- 
sources necessary  to  adjust  to  its  changed  circumstances. 

[2091]  Frequent  reference  has  been  made  to  the  Postal  Service's  intent  to  build 
equity.  Witness  Bjoni  states,  "[t]here  has  [sic]  to  be  some  other  actions  that  are 
taKen  on  behalf  of  the  Postal  Service  in  developing  a  plan  as  to  what  are  they  spe- 
cifically going  to  do  in  the  fiiture  to  build  that  equity."  Tr.  6/2724.  Witness  Porras 
testifies  that,  "Mr.  Bjom's  recommendation  that  the  postal  service  conduct  this  re- 
view has  been  accepted  by  postal  management  and  we  have  contracted  with  Price 
Waterhouse  to  advise  us  in  this  effort  as  it  proceeds."  Tr.  24/11250.  An  essential 
ingredient  of  any  such  plan  must  be  the  determination  by  the  Postal  Service  to  re- 
spond to  the  Act's  stipulation  that  rates  and  fees  shall  provide  revenues  sufficient 
to  equal  the  cost  of  operations  under  honest,  efficient,  and  economical  management. 
In  order  for  the  Postal  Service  to  breakeven,  its  revenues  must  cover  its  costs.  As 
witness  Geddes  contends,  "If  the  break-even  requirement  is  to  perform  its  function, 
the  Postal  Service  must  face  the  economic  consequences  of  raising  rates  to  reflect 
its  costs."  Tr.  14A/6731.  If  costs  continue  to  exceed  revenues,  equity  will  continue 
to  erode. 

[2092]  As  a  matter  of  fact,  revenue  must  exceed  costs  if  the  RPYL  is  to  be  accom- 
plished. It  is  this  excess  of  revenue  over  costs  that,  for  the  Postal  Service,  would 
become  RPYL.  When  the  total  RPYL  reaches  the  goal  targeted  by  the  Postal  Serv- 
ice, it  would  no  longer  be  necessary  to  include  such  a  provision  in  the  revenue  re- 

[2093]  In  1968  the  President's  Commission  on  Postal  Organization  expressed  con- 
cern because,  "[i]f  present  cost  trends  continue  .  .  .  the  cumulative  deficit  over  the 
next  decade  will  approach  $15  billion."  Toward  Postal  Excellence  at  24.  Twenty- 
three  years  after  the  Postal  Reform  Act,  which  was  designed  to  avoid  this  con- 
sequence, the  Service  is  again  running  chronic  deficits  with  a  cumulative  deficit  of 
$9.4  billion.  While  reorganization  led  to  improvements  in  the  cumulative  deficit 
trend,  it  has  not  lived  up  to  the  exoectations  of  break-even  operations.  This  Com- 
mission has  provided  the  Service  with  the  rates  sufficient  to  cover  expenses  as  esti- 
mated by  the  Postal  Service,  as  well  as  rates  sufficient  to  recover  PYL  in  order  to 
restore  its  equity.  It  is  not  responsible  for  the  management  of  the  Service.  Only 
Postal  Service  management  can  assure  that  the  Service  operates  on  a  break-even 
basis  and  restores  its  equity  position. 


Attachment  B 

Post  Office  Closings  and  Consolidations  Table 

Docket  No.  and  Name  of  City  Decision 

A78-1  Gresham,  SC Dismissed:  jurisdiction 

A79-1  Lone  Grove,  TX  Remanded:  close 

A79-2  Westville,  PA Remanded:  close 

A79-3  Graves  Mill,  VA Remanded:  close 

A79-4  Tippo,  MS Remanded:  consolidate  (CPO) 

A79-5  Bay  Center,  WA Remanded:  consolidate  (CPO) 

A79-6  Gulf,  NC Remanded:  close 

A79-7  Craigsville,  PA Remanded:  close 

A79-8  Overly,  NO Remanded;  close 

A79-9  Suplee,  PA  Remanded:  close 

A79-10  La  Jose,  PA Remanded:  close 

A79-11  Normanna.  T.  X  Remanded:  consolidate  (CPO) 

A79-12  Clune,  PA Remanded:  close 

A79-13  Souttifield,  MA Remanded:  consolidate  (CPO) 

A79-14  Filler,  MS  Remanded:  close 

A79-15  Keyapaha,  SO  Remanded:  consolidate  (CPO) 

A79-16  New  Geneva,  PA  Remanded:  close 

A79-17  Reed,  OK Remanded:  close 

A7^18  McElhattan.  PA Remanded:  close 

A79-19  Sugar  Run,  PA Remanded:  close 

A79-20  Balsam  Grove,  NC Remanded:  close 

A79-21  Prairie,  AL Remanded:  close 

A79-22  Bill,  WY Remanded:  close 

A79-23  Clinchport,  VA Affirmed:  close 

A80-1  Glenwood  Landing.NY Dismissed:  Postal  Service:  consolidation 

A80-2  Alexander,  VW Affirmed:  close 

A80-3  Palm  City,  FL Remanded:  consolidate 

A80-4  Mt.  Een,  CA  Affirmed:  consolidate  (station) 

A80-5  Leckrone,  PA Dismissed:  Postal  Service:  close 

A80-6  Carlisle,  MS Dismissed:  Petitioners:  consolidate 

A80-7  Condon,  MT Remanded:  consolidate  (CPO) 

A80-8  Painton,  MO Dismissed:  Postal  Service:  close 

A80-9  Muggins,  MO Remanded:  close 

A80-10  Saratoga,  CA  Dismissed:  Postal  Service 

A81-1  Dalton,  AR  Affirmed;  close 

A81-2  Mayfield,  GA  Dismissed;  jurisdiction;  close;  relief 

A81-3  Oswego,  SC Affirmed;  close 

ASM  Seapines  Stat.,  VA Dismissed;  premature 

A82-1  Arcadia,  TX Affirmed;  consolidate  (station) 

A82-2  Station  B,  NY Wittidrawn;  relief  given  by  Postal  Service 

A82-3  West  Barnet,  VT Affirmed;  close 

A82-4  Donnan,  lA Affirmed;  close 

A82-5  Webb  City,  OK Remanded;  close 

A82-6  Stonewall,  AR  Affirmed;  consolidate  (CPO) 

A82-7  Woolsey,  GA  Affirmed;  close 

A82-8  Snydertown,  PA Affirmed;  consolidate  (CPO) 

A82-9  Sessums,  MS  ?. Affirmed;  consolidate  (CPO) 

A82-10  Oceana  Station,  VA  Dismissed;  jurisdiction 

A82-11  Siberia,  IN Affirmed;  close 

A82-12  Holy  City,  CA Affirmed;  close 

A82-13  Mayfield,  OK  .-. Remanded;  close 

A82-14  Glenwood,  UT Affirmed;  consolidate  (CPO) 

A82-15  Montrose,  MS Affirmed;  close 

A82-16  Tomnolen,  MS Affirmed;  consolidate  (CPO) 

A83-1  Ravalli,  MT  Affirmed;  consolidate  (CPO) 

A83-2  Ruby  Valley,  NV Affirmed;  consolidate  (CPO) 

A83-3  Mountville,  GA  Affirmed;  consolidate  (CPO) 

A83-4  Ferdig,  MT Affirmed;  close 

A83-5  Clark,  OH  Affirmed;  close 

A83-6  Nipton,  CA  Affirmed;  close 

A83-7  Beowawe.  NV Affirmed;  consolidate  (CPO) 

A83-8  Sigurd,  UT Dismissed;  untimely 


Post  Office  Closings  and  Consolidations  Table — Continued 

Docket  No.  and  Name  of  City 


A83-9  Colon.  NC Affirmed;  close 

A83-10  Liberty  Farms.  CA Dismissed:  petitioners-,  closed 

A83-11  DeBorgta,  MT  Affirmed;  consolidate  (CPO) 

A83-12  Bladon  Springs,  AL Affirmed;  close 

A83-13  Reed,  OK Affirmed;  consolidate  (CPO) 

A83-14  Sublime,  TX  Dismiss;  untimely:  consolidate  (CPO) 

A83-15  Burr  Oak.  IN  Affirmed;  close 

A83-16  Cantil,  CA  AHirmed;  consolidate  (CPO) 

A83-17  Grand  Pass.  MO  Affirmed;  close 

A83-18  Madras.  GA Affirmed;  consolidate  (CPO) 

A83-19  Griswoldville.  MA Affirmed;  close 

A83-20  Windsorville.  CT Affirmed;  close 

A83-21  Cropper,  KY Affirmed;  close 

A83-22  Baxter.  CA Affirmed;  consolidate  (CPO) 

A83-23  Marietta,  WA Affirmed;  close 

A83-24  Lone  Grove,  TX Affirmed;  close 

A83-25  Coalmont,  CO  Dismissed;  untimely;  close 

A83-26  Mechanicsville,  CT  Dismissed;  untimely;  close 

A83-27  Winston,  MT Affirmed;  consolidate  (CPO) 

A83-28  Uler.  WV Affirmed;  close 

A83-29  Wendell.  NH  Affirmed;  close 

A83-30  Knob  Fork,  WV  Remanded;  close  (CPO) 

A84-1  Oakley.  SC  Affirmed;  close 

A84-2  Dorchester.  TX  Affirmed;  close 

A84-3  So.  Bloomingville,  OH Affirmed;  consolidate  (CPO) 

A84-4  Silver  Bell,  AZ Affirmed;  close 

AR4-5  Foraker.  IN Remanded;  close  (CPO) 

A84-6  Benoit,  Wl  Affirmed;  consolidate  (CPO) 

A84-7  Cotter,  lA  Dismissed;  Postal  Service;  close 

A84-8  Atlanta,  OH Affirmed;  close 

A84-9  Mitchell,  LA Affirmed;  close 

A84-10  Elm  Grove.  OH  Dismissed;  untimely;  close 

A84-11  Hustler.  Wl  Affirmed;  consolidate  (CPO) 

A84-12  Bloom  City.  Wl  Affirmed;  consolidate  (CPO) 

A84-13  Dodgeville,  Ml Dismissed;  untimely;  close 

A84-14  Milford,  MO Dismiss;  untimely;  consolidate 

A84-15  East  Orwell,  OH  Affirmed;  close 

A84-16  Hanover,  Wl  Dismissed;  untimely;  close 

A85-1  Ames,  NE Affirmed;  consolidate  (CPO) 

A85-2  Buskirk.  NY Dismissed;  Postal  Service;  close 

A85-3  Maud.  KY  Affirmed;  close 

A85-4  Dahlen,  ND  Affirmed;  close 

A85-5  West  Coxsackie,  NY Affirmed;  consolidate  (CPO) 

A85-6  Durbin,  ND Affirmed;  close 

A85-7  Rock  Glen.  NY Affirmed;  close 

A85-8  Job,  WV  Affirmed;  close 

A85-9  Wadsworth,  NY  Affirmed;  close 

A85-10  West  Townsend.  MA  Affirmed;  close 

A8&-11  Roanoke.  WV Remanded;  close 

A85-12  Williams  Mtn.  WV Affirmed;  close 

A85-13  Philomath,  GA Affirmed;  close 

A85-14  Range,  AL  Affirmed;  consolidate  (CPO) 

A85-15  Chester  Depot,  VT  Affirmed;  consolidate  (CPO) 

A85-16  Boyds,  WA Affirmed;  close 

A85-17  Ranchita.  CA  Remanded;  close  (CPO) 

A85-18  Guatay,  CA Affirmed;  consolidate  (CPO) 

A85-19  East  Nicolaus,  CA  Affirmed;  consolidate  (CPO) 

A85-20  Little  Norway,  CA Affirmed;  consolidate  (CPO) 

A85-21  Yorkville,  CA  Remanded;  close 

A85-22  Louvale,  GA Remanded;  close 

A85-23  Pacific  House,  CA Dismissed;  untimely;  consolidate 

A85-24  Whitestone,  GA  Affirmed;  close 

A85-25  Grady,  OK Affirmed;  close 

A85-26  North  Scituate,  MA Affirmed;  consolidate  (station) 


Post  Office  Closings  and  Consolidations  Table — Continued 

Docket  No.  and  Name  of  City  Decision 

A85-27  Wishon.  CA  Affirmed;  close 

A8S-28  Femdale,  FL Dismissed;  Postal  Service,  consolidate  (CPO) 

A85-29  St.  Charles,  SC Affirmed;  close 

A85-30  Moreno,  CA  Affirmed;  consolidate  (branch) 

A85-31  Croydon,  UT Dismissed;  Postal  service;  close 

A86-1  Leach,  TN Affirmed;  close 

A8&-2  Centerfield,  UT  Remanded;  close 

A86-3  Chatham,  MS Affirmed;  consolidate  (CPO) 

A86-4  Sanitaria  Springs,  NY Affirmed;  close 

A86-5  Perry,  SC Affirmed;  consolidate  (CPO) 

A86-6  Fitzhugh,OK Remanded;  close 

A86-7  Longstreet.  LA Affirmed;  consolidate  (CPO) 

A86-8  Quaker  Street,  NY Premature 

A8&-9  Tie  Plant,  MS Affirmed;  consolidate  (CPO) 

A8&-10  South  Grafton,  MA Remanded;  consolidate  (CPO) 

A8&-11  Greene,  Rl Dismissed;  untimely;  close 

A86-12  Oakland,  Rl Affirmed;  close 

A8&-13  Wellfleet,  MA Dismissed;  jurisdiction 

A86-14  Croydon,  UT  Affirmed;  close 

A86-15  Palo  Verde.  A2 Affirmed;  consolidate  (CPO) 

A86-16  Academy,  SO Affirmed;  close 

A86-17  Wallpack  Center,  NJ  Dismissed;  Postal  Service;  close 

A86-18  Owanka,  SO  Affirmed;  close 

A86-19  Given,  WV  Remanded;  close 

A8&-20  Arenas  Valley,  NM  Affirmed;  close 

A86-21  No.  Westchester,  CT Affirmed;  close 

A87-1  Pinero,  VA Affirmed;  close 

A87-2  Vanna,  GA Affirmed;  close 

A87-3  Wallpack  Center,  NJ  Dismissed;  Postal  Service;  close 

A87-4  Centerfield,  UT  Affirmed;  close 

A87-5  Burkville,  AL  Affirmed;  close 

A87-6  Palms,  Ml  Affirmed;  close 

A87-7  Pearl  Beach,  Ml Affirmed;  consolidate  (branch) 

A87-8  Vernon,  AZ Dismissed;  Postal  serv.;  consol. 

A87-9  Fackler,  AL Affirmed;  consolidate  (CPO) 

A87-10  Rogers,  NE Affirmedj  consolidate  (CPO) 

A87-11  Fabius,  AL Affirmed;  close 

A88-1  Bern,  ID  Affirmed;  close 

A88-2  Rago,  KS Remanded;  close 

A88-3  Willow  Island,  WV Dismissed;  Postal  Service;  close 

A88-4  Powder  Springs,  TN Remanded;  consolidate  (CPO) 

A88-5  Forksville,  VA Affirmed;  close 

A88-6  Laird,  CO  Dismissed;  untimely;  close 

A88-7  Vanadium,  NM Affirmed;  close 

A88-8  Honey  Creek,  lA  Remanded;  close 

A88-9  Banco,  VA Affirmed;  consolidate  (CPO) 

A88-10  Brownlee,  NE  Affirmed;  close 

A89-1  North  Egremont,  MA , Dismissed;  Postal  Service  (CPO) 

A89-2  Dallas,  lA Affirmed;  consolidate  (station) 

A89-3  Kurtz,  IN Affirmed;  consolidate  (CPO) 

A89-4  McClelland,  lA  Affirmed;  consolidate  (CPO) 

A89-5  Crawford,  WV Dismissed;  untimely;  close 

A89-6  Hoyt,  CO Dismissed;  Postal  Service;  close 

A89-7  New  Site.  MS Affirmed;  consolidate  (CPO) 

A89-8  Lafontaine,  KS Premature;  suspension 

A89-9  Elsmere,  NE Remanded;  close 

A89-10  Fineview,  NY  Premature;  suspension 

A89-11  Montpelier.  MS Affirmed;  consolidate  (CPO) 

A89-12  Hoxeyville.  MS Affirmed;  close 

A89-13  Swan  Lake,  MS Affirmed;  consolidate  (CPO) 

A90-1  Powder  Springs,  TN Affirmed;  consolidate  (CPO) 

A90-2  Hanover,  AR Affirmed;  close 

A90-3  Dunn,  LA Dismissed;  untimely;  close 

A90-4  Wolf  Run.  OH Remanded:  close 


Post  Office  Closings  and  Consolidations  Table — Continued 

Docket  No.  and  Name  of  City 


A91-1  Rock  Point.  MD Dismissed;  Postal  Service;  close 

A91-2  Northboro,  lA Affirmed;  consolidate  (CPO) 

A91-3  Seneca,  Ml  Remanded;  close 

A91-4  San  Fran.  Main,  CA Dismissed;  jurisdiction 

A91-5  Elsmere.  NE  Affirmed;  close 

A91-6  Pardeesville,  PA Dismissed;  untimely;  close 

A91-7  Weston,  Ml Dismissed;  Postal  Service;  close 

A91-8  Angus,  MN  Affirmed;  consolidate  (CPO) 

A91-9  Extension,  LA  Remanded;  close 

A91-10  Mount  Clemens,  Ml  Dismissed;  jurisdiction 

A91-11  Jenkins  Bridge,  VA Dismissed;  Postal  Service;  close 

A91-12  Liberty,  NE  Affirmed;  consolidate  (CPO) 

A91-13  Wiley,  GA Dismissed;  Postal  Service;  close 

A91-14  Union  Level,  VA  ,  Affirmed;  close 

A92-1  Sample,  KY  Affirmed;  close 

A92-2  Vernon,  OK Dismissed;  untimely;  close 

A92-3  Susank,  KS  Affirmed;  close 

A92-4  Carrothers,  OH Affirmed;  close 

A92-5  Skene,  MS Affirmed;  close 

A92-6  Village,  VA Dismissed;  Postal  Service;  close 

A92-7  Nooksack,  WA  Affirmed;  consolidate  (station) 

A92-8  Maskell,  NE Affirmed;  close 

A92-9  Fabyan,  CT Affirmed;  close 

A92-10  Ben  Arnold,  TX Affirmed;  close 

A92-11  Buckeye,  LA  Affirmed;  close 

A92-12  Summit,  KY Affirmed;  consolidate  (CPO) 

A92-13  Milfay,  OK Dismiss;  Postal  Service;  consolidate  (CPO) 

A93-1  West  Rushville,  OH Remanded;  close 

A93-2  Bavon,  VA Affirmed;  close 

A93-3  Wolf  Run,  OH Dismiss;  Postal  Service;  close 

A93-4  Hertel,  Wl  Dismiss;  Postal  Service;  close 

A93-5  Pershing,  lA  Affirmed;  close 

A93-6  Schroeder,  MN  Dismiss;  Postal  Service;  consolidate  (CPO) 

A93-7  Frontenac,  MN  Remanded;  consolidate  (CPO) 

A93-8  Wolf  Lake,  MN  Affirmed;  consolidate  (CPO) 

A93-9  Segundo,  CO Affirmed;  close 

A93-10  Beaverlett,  VA Affirmed;  close 

A93-11  Colfax,  ND Dismissed;  Postal  Service;  consolidate 

A93-12  McAdams,  MS Affirmed;  consolidate  (CPO) 

A93-13  Ithaca,  NY Dismissed;  jurisdiction;  consolidate 

A93-14  Winchester,  TX , Dismissed;  untimely;  close 

A93-15  Lodi,  TX Dismissed;  Postal  Service;  close 

A93-16  Lille,  ME Dismissed;  untimely;  close 

A93-17  Morrison,  Iowa  Remanded;  consolidate  (CPO) 

A93-18  Gray,  Iowa Remanded;  close 

A93-19  Cataract,  Wl  Affirmed;  consolidate  (CPO) 

A94-1  Waka,  TX Affirmed;  consolidate  (CPO) 

A94-2  Extension.  LA Affirmed;  close 

A94-3  Inavale,  NE  Affirmed;  consolidate  (CPO) 

A94-4  Boone,  NE  Dismissed;  untimely;  close 

A94-5  Moriah,  NY Dismissed;  Postal  Service,  consolidate 

A94-6  Poland,  ME  Affirmed;  close 

A94-7  Holden,  Ln' Dismissed;  Postal  Service;  consolidate  (CPO) 

A94-8  Benedict,  MN Remanded;  consolidate  (CPO) 

A94-9  Green  Mountain,  lA  Affirmed;  consolidate  (CPO) 

A94-10  Fairfield,  NY Affirmed;  close 

A94-11  E.  Greenwich,  NY Affirmed;  close 

A94-12  Petroleum.  WV  Dismissed;  Postal  Service;  close 

A94-13  Strang,  NE  Remanded;  consolidate  (CPO) 

A94-14  Otisco,  MN  Affirmed;  close 

A95-1  Rodman,  lA Affirmed;  close 

A95-2  Valley  Home,  CA Dismissed,  Postal  Service,  close 

A95-3  Filer  City,  Ml  Remanded;  close 

A95-4  Numa,  lA close 


Post  Office  Closings  and  Consolidations  Table — Continued 

DocKet  No.  and  Name  of  City  Decision 

A95-5  Oak,  NE consolidate  (CPO) 

A95-6  OeGraff.  MN close 

A95-7  Toronto,  lA  close 

A95-8  Benedict,  MN consolidate  (CPO) 

A95-9  Clarkia,  ID  consolidate  (CPO) 

A95-10  Cotesfield,  NE close 

Attachment  C 
docket  no.  r94-1 

[1081]  International  Mail.  In  its  filing  in  this  docket,  the  Postal  Service  elimi- 
nated virtually  all  of  the  data  that  it  formerly  provided  supporting  its  test  year  fore- 
casts of  the  costs,  volumes,  and  revenues  generated  by  international  mail.  In  motion 
practice,  the  Postal  Service  defended  this  change  by  asserting  that  supporting  detail 
for  its  international  mail  forecasts  are  relevant  only  to  setting  international  mail 
rates,  and  that  the  Commission  has  no  jurisdiction  over  these  rates.  Federal  Ex- 
press Corporation  (FEC)  attempted  to  fiU  the  resulting  gap  in  the  record  through 
discovery,  largely  without  success.  On  brief,  it  and  the  Air  Courier  Conference  of 
America  (ACCA)  ask  the  Commission  to  reaffirm  their  right  to  a  hearing  on  the 
issue  of  the  impact  of  financial  forecasts  for  international  mail  on  domestic  mail 
costs  and  revenues. 

[1082]  In  order  to  avoid  the  procedural  impasse  that  prevented  a  meaningful 
hearing  on  those  issues  in  this  proceeding,  they  ask  the  Commission  to  conduct  a 
rulem^dng  prior  to  the  next  omnibus  rate  case  to  establish  minimum  standard  doc- 
umentation requirements  for  international  mail  forecasts.  In  this  docket,  they  pro- 
pose that  the  Commission  attribute  to  international  mail  some  of  the  administrative 
costs  that  they  say  it  incurs.  They  also  propose  that  the  Commission  adjust  the  rel- 
ative institutional  cost  contribution  of  international  and  domestic  mail  to  ensure 
that  the  former  is  fair  and  reasonable.  Their  proposals  are  addressed  in  the  costing 
section,  at  para.  3193. 

[1083]  There  are  two  sources  of  Commission  jurisdiction  granting  the  right  to  ex- 
amine the  basis  of  the  Postal  Service's  financial  forecasts  for  international  mail.  The 
first  is  39  U.S.C.  §3621,  which  requires  that  hearings  on  requests  for  changes  in 
domestic  mail  rates  consider  all  of  the  sources  of  Postal  Service  revenue  in  deter- 
mining what  share  of  its  total  revenue  needs  must  be  provided  by  domestic  mail. 
Under  section  3621,  the  costs  and  revenues  of  international  mail  must  be  estimated 
and  deducted  fix)m  the  total  costs  of  the  postal  system  in  order  to  determine  the 
amount  of  revenue  that  must  be  raised  from  domestic  mail.  In  this  proceeding,  the 
Commission  reaffirmed  that  intervenors  have  a  right  to  a  hearing  on  the  issue  of 
the  accuracy  and  reliability  of  the  Postal  Service's  estimate  of  the  domestic  mail 
share  of  the  total  revenue  requirement.  Since  that  depends,  in  part,  on  whether  its 
international  mail  cost  and  revenue  estimates  are  accurate  and  reliable,  intervenors 
have  a  right  to  know  the  basis  of  those  estimates.  See  Order  No.  1025  (August  17, 
1994)  at  4-13. 

[1084]  The  second  source  of  Commission  jimsdiction  to  examine  the  basis  of  the 
Postal  Service's  financial  forecasts  is  39  U.S.C.  §  3622(b)(3).  Section  3622(b)(3)  re- 
qviires  that  no  class  of  mail  bear  costs  that  can  be  reliably  attributed  to  another 
mail  class.  Under  it,  intervenors  have  a  right  to  a  hearing  on  the  question  of  wheth- 
er the  Postal  Service's  attributable  costs  have  been  accurately  divided  between 
international  and  domestic  mail.  If  costs  could  be  reUably  attributed  to  international 
mail  but  are  not,  they  are  either  misattributed  to  domestic  mail,  or  assigned  pri- 
marily to  domestic  mail  as  institutional  costs.  ^^  Neither  result  is  consistent  with 
section  3622(b)(3).  Id.  at  9-13. 

[1085]  Backgound.  In  prior  omnibus  rate  proceedings  the  Postal  Service  provided 
partial  docxunentation  of  its  financial  forecasts  for  international  mail.  It  acknowl- 
edged that  the  costs  and  revenues  generated  by  international  mail  must  be  esti- 
mated in  order  to  determine  the  revenue  required  from  domestic  mail.  See,  e.g.. 
Docket  No.  R87-1,  Response  of  Postal  Service  Witness  Ashley  Lyons  to  Interrog- 

*i  Because  more  than  98  percent  of  any  dollar  of  institutional  costs  has  been  borne  by  domes- 
tic mail  in  recent  years,  any  underattribution  of  costs  to  international  mail  will  devolve  almost 
entirely  on  domestic  mailers. 


atory  FCG-T-17-2.  The  Postal  Service  also  demonstrated  that  the  effect  of  errors 
in  financial  forecasts  for  international  mail  on  the  domestic  mail  revenue  reqviire- 
ment  can  be  substantial.  In  Docket  No.  R90-1  the  Postal  Service  argued  that  the 
test  year  revenue  requirement  that  the  Commission  recommended  for  domestic  mail 
should  be  increased,  in  part,  to  offset  the  Postal  Service's  apparent  overestimate  of 
test  year  revenues  from  international  mail  of  between  $114  and  $320  million.  ^^ 

[1086]  The  supporting  detail  that  the  Postal  Service  formerly  provided  in  its  rate 
filings,  supplemented  by  its  responses  to  discovery,  permitted  some  independent 
analysis  and  verification  of  its  estimates.  The  Postal  Service  provided  the  results  of 
IOCS  sampling  of  the  domestic  processing  costs  of  international  mail;  compilations 
of  that  data  for  22  categories  of  outbound,  and  nine  categories  of  inbound  inter- 
national mail  in  its  LIOCATT  reports;  transportation  cost  data  for  eight  categories 
of  outbound  and  seven  merged  categories  of  inbound  mail;  and  other  cost  segment 
and  component  data  for  seven  categories  of  outbound  and  inbound  international 
mail  in  its  Cost  Segment  and  Components  Reports.  In  the  past  it  also  explained  its 
methods  for  forecasting  international  mail  volumes  and  revenues.  See  Order  No. 
1025  at  22-23. 

[1087]  In  its  fiUng  in  this  docket,  however,  the  Postal  Service  purged  most  of  the 
information  relating  to  international  mail  from  its  reports  developed  from  general 
cost  sampling  and  reporting  systems.  For  example,  it  eliminated  IOCS  sample  data 
relating  to  international  mail.  It  also  eliminated  the  IOCS  codes  from  its  LIOCATT 
report  that  allow  the  domestic  mail  processing  costs  incurred  by  the  international 
services  to  be  distinguished  ft-om  those  incurred  by  domestic  mail.  In  addition,  it 
eliminated  from  its  domestic  purchased  transportation  cost  report  (TRACS)  informa- 
tion that  distinguishes  domestic  transportation  costs  incurred  by  international  mail 
from  those  incurred  by  domestic  mail. 

[1088]  The  Postal  Service  denies  that  section  3621  makes  international  and  do- 
mestic mail  financially  interdependent,  or  that  section  3622(b)(3)  gives  rise  to  any 
need  to  examine  how  international  mail  costs  are  identified  and  distinguished  from 
the  costs  of  domestic  mail.  In  response  to  discovery  requests,  the  Postal  Service  took 
the  position  that  any  supporting  information  for  its  forecast  of  total  international 
mail  costs,  volumes,  and  revenues  is  irrelevant,  unduly  burdensome  to  provide,  and 
qualifies  for  the  trade  secret  privilege.  It  said  that  this  applied  as  much  to  the  sup- 
porting information  that  it  had  provided  in  past  proceedings  as  to  supporting  infor- 
mation requested  for  the  first  time  in  this  proceeding.  Response  of  U.S.  Postal  Serv- 
ice to  Motion  of  Federal  Express  Corporation  to  Compel  Responses  to  Interrogatories 
and  Document  Production  Requests  FEC/USPS-2(c)  to  24  and  FEC/USPS-T4-2  to 
15  (Postal  Service  Response)  (June  13,  1994)  at  21.  It  asserted  that  it,  rather  than 
the  Commission,  would  ultimately  decide  whether  to  allow  discovery  of  such  infor- 
mation. USPS  Motion  for  Protective  Order  and  Comments  Concerning  Information 
to  be  Provided  Pursuant  to  Protective  Order  In  Response  to  Commission  Order  No. 
1025  (August  29,  1994)  at  9  and  Statement  of  the  USPS  Concerning  Order  No.  1034 
(November  3,  1994)  at  9-10. 

[  1089]  In  order  to  justify  its  new  policy  of  non-disclosure,  the  Postal  Service  stead- 
fastly refused  to  acknowledge  that  information  supporting  its  cost  and  revenue  fore- 
casts for  international  mail  can  be  used  for  any  purpose  other  than  helping  it  to 
determine  what  rates  to  charge  for  international  maU.  It  is  clear,  however,  that  such 
supporting  information  can  also  be  used  to  estimate  the  impact  that  international 
mail  will  have  on  the  domestic  mail  revenue  requirement,  to  verify  that  costs  have 
not  been  underattributed  to  international  mail,  and  to  verify  that  costs  have  not 
been  misattributed  to  domestic  mail.  See  P.O.  Ruling  R87-1/78  at  2. 

[1090]  Order  No.  1025.  The  Commission  issued  Order  No.  1025  in  response  to  mo- 
tions to  compel  information  supporting  the  Postal  Service's  forecasts  of  the  total 
cost,  volume,  and  revenue  of  international  mail.  It  concluded  that  because  of  the 
substantial  uncertainty  that  surrounds  the  Postal  Service's  international  mail  fore- 
casts, there  is  a  need  for  some  disaggregation  of  the  data  on  which  those  forecasts 
are  based,  and  some  explanation  of  the  method  by  which  such  data  are  projected 
to  the  test  year.  Order  1025  at  6-13.  It  therefore  ordered  the  Postal  Service  to  pro- 
vide costs,  volumes,  and  revenues  for  international  mail,  disaggregated  to  an  inter- 
mediate level  designed  to  avoid  the  disclosure  of  information  likely  to  cause  competi- 
tive harm. 

12  See  Docket  No.  R90-1,  Statement  and  Declaration  of  Ashley  Lyons  on  Behalf  of  the  USPS, 
submitted  with  Comments  of  the  USPS  Regarding  Presiding  Officer's  Notice  Concerning  FY 
1990  Billing  Determinant  Information,  September  25,  1991;  Further  Statement  and  Declaration 
of  Ashley  Lyons  on  Behalf  of  the  United  States  Postal  Service,  submitted  with  Postal  Service 
Response  to  Presiding  Officer  Information  Request  No.  2  on  Reconsideration,  September  27, 


[1091]  The  Postal  Service  has  acknowledged  that  its  international  mail  forecasts 
can  be  uncertain,  and  that  this  uncertainty  engenders  corresponding  uncertainty  in 
its  forecasts  of  the  revenue  that  will  be  required  from  domestic  mail.  In  Docket  No. 
R90-1,  it  cited  the  inaccuracy  of  its  forecast  of  test  year  international  mail  revenue 
as  a  major  reason  for  changing  the  domestic  mail  revenue  requirement  rec- 
ommended by  the  Commission.  It  noted  that  its  initial  forecast  of  international  reve- 
nues appeared  likely  to  have  been  substantially  overestimated.  Subsequent  events 
have  shown  that  its  concern  was  well-founded. 

[1092]  FY  1992  figures  show  that  the  Postal  Service's  Docket  No.  R90-1  forecast 
of  test  year  costs  for  international  mail  were  underestimated  by  19  percent.  The 
Docket  No.  R90-1  test  year  cost  coverage  for  international  mail  was  113  percent, 
rather  than  the  139  percent  that  the  Postal  Service  had  forecast.  Consequently,  the 
Postal  Service  overestimated  the  contribution  to  institutional  costs  from  inter- 
national mail  in  the  Docket  No.  R90-1  test  year  by  $217  million,  or  244  percent. 
SeeFEC  Brief  at  7. 

[1093]  There  are  substantial  reasons  in  this  proceeding,  as  well,  for  regarding  the 
Postal  Service's  international  mail  forecasts  as  uncertain.  In  contrast  to  the  rapid, 
unexplained  escalation  of  international  mail  costs  during  the  years  FY  1989-92, 
international  mail  costs  apparently  changed  little  in  FY  1993  (increasing  only  1.7 
percent).  This  is  particularly  remarkable  since  volume  surged  15  percent  in  that 
year.  Id.  at  8.  The  record  contains  no  information  concerning  the  causes  of  this  ab- 
rupt reversal  of  recent  trends  and  no  basis  for  determining  whether  it  is  Ukely  to 

[1094]  The  Postal  Service's  Docket  No.  R94-1  test  year  forecast  of  the  inter- 
national mail  contribution  to  institutional  costs  is  based  on  the  FY  1993  base  year 
figures.  If  the  unaccountably  positive  FY  1993  results  turn  out  to  be  an  anomaly, 
the  institutional  cost  contribution  from  international  mail  in  the  test  year  could  fall 
weU  below  the  Postal  Service's  projections  again  in  Docket  No.  R94-1.  Indeed,  its 
institutional  cost  contribution  might  even  be  negative.  The  Postal  Service  projects 
that  the  cost  coverage  for  international  mail  \^  decUne  to  122  percent  for  the 
Docket  No.  R94-1  test  year.  If  this  cost  coverage  were  overestimated  by  26  percent- 
age points,  as  it  was  in  Docket  No.  R90-1,  international  mail  revenue  would  fall 
below  its  attributable  costs,  thus  violating  section  3622(b)(3).  This  risk  illustrates 
the  need  for  intervenors  and  the  Commission  to  know  the  basis  of  the  Postal  Serv- 
ice's test  year  forecasts  of  the  costs,  volumes,  and  revenues  of  international  mail. 

[1095]  Order  No.  1025  addressed  the  Postal  Service's  contention  that  the  interve- 
nors and  the  Commission  have  no  need  to  know  the  basis  of  its  international  mail 
cost  and  revenue  forecasts.  As  the  Order  notes,  the  Postal  Service  simply  asserts, 
without  analysis,  that  verifying  the  domestic  mail  revenue  requirement  does  not  de- 
pend on  verifying  international  mail  revenues.  USPS  Motion  for  Protective  Order 
at  4.  As  to  the  division  of  costs  between  domestic  and  international  mail,  the  Postal 
Service  asserts,  again  without  analysis,  that  domestic  cost  information  is  sufficiently 
detailed  to  reveal  any  errors.  ^^ 

[1096]  Order  No.  1025  found  the  Postal  Service  provided  no  basis  for  these  asser- 
tions. For  reasons  explained  above,  the  dependence  of  the  domestic  revenue  require- 
ment on  international  costs  and  revenues  is  vmdeniable.  See  Order  No.  1025  at  4- 
9.  With  respect  to  international  mail  costs.  Order  No.  1025  notes  that  most  of  them 
are  incurred  while  undergoing  the  same  operations  that  domestic  mail  undergoes.^'* 
Therefore,  the  only  way  to  know  that  such  a  cost  appearing  in  the  Postal  Service's 
spreadsheets  belongs  to  international  mail  is  by  the  IOCS  activity  code  indicating 
that  it  was  incurred  by  international  mail.  By  deleting  those  codes  from  its  submis- 
sions, the  Postal  Service  removed  the  only  means  of  identifying  which  domestic  costs 

13  Postal  Service  Response  at  3.  Several  witnesses  have  raised  doubts  whether  the  detail  the 
Postal  Service  provides  for  the  domestic  costs  that  mail  incurs  is  always  sufficient  to  identify 
reliably  the  classes  of  mail  that  cause  them.  Time-Warner  witness  Stralberg,  for  example,  as- 
serts mat  the  proportion  of  the  costs  of  domestic  operations  incurred  by  '  mixed  mail"  have 
grown  rapidly  in  recent  years,  while  the  Postal  Service's  ability  to  associate  them  with  mail 
classes  has  grown  increasingly  suspect.  This  is  due,  in  part,  to  me  Postal  Service's  elimination 
of  more  than  half  of  the  cost  detail  that  it  formerly  gathered  concerning  such  "mixed  mail"  costs. 
Tr.  15/7133-34.  In  addition,  in  Docket  No.  R90-1,  OCA  witness  Ramage  has  raised  substantial 
doubts  about  the  reliability  of  the  distribution  of  these  costs  to  mail  classes.  See  Docket  No. 
R90-1,  OCA-T-100  at  24-32.  Domestic  "mixed  mail"  processing  costs  are  distributed  to  both 
domestic  and  international  mail. 

1"*  International  and  domestic  mail  are  often  commingled  for  domestic  processing  according  to 
shape,  e.g.,  letters,  flats,  etc.  The  only  way  to  verify  whether  such  costs  were  incurred  by  inter- 
national rather  than  domestic  mail  is  by  the  identifying  codes  that  the  Postal  Service  has  with- 
held. See,  e.g.,  the  distribution  of  the  costs  associated  with  mixed  mail  code  5610  for  letter- 
shaped  mail  to  the  categories  of  domestic  and  international  mail  according  to  activity  codes  1000 
to  1950.  USPS-LR-G-1,  App.  B-2  at  2  and  9,  and  App.  E. 


were  incurred  by  international  mail,  and  which  were  incurred  by  domestic  mail. 
Order  No.  1025  also  rejects  the  Postal  Service's  contention  that  an  underattribution 
of  costs  to  international  mail  does  not  increase  the  costs  borne  by  domestic  mail  as 
unexplained  and  unsupported.  Postal  Service  Response  at  6. 

[1097]  In  Order  No.  1025,  the  Commission  also  rejects  the  Postal  Service's  claim 
that  any  and  all  supporting  information  underlying  its  forecast  of  cost,  volume,  and 
revenue  for  international  mail  qualifies  as  a  trade  secret.  The  Commission  observed 
that  this  blanket  claim  is  speculative  and  conclusory,  and  therefore  inadequate  to 
support  a  trade  secret  claim  under  applicable  legal  standards.  It  noted  that  those 
standards  require  the  Postal  Service  to  make  a  much  more  concrete  showing  of  Uke- 
ly  competitive  harm  than  it  attempted.  ^^  The  Postal  Service  does  not  dispute  that 
this  is  the  standard  that  the  law  has  established  for  invoking  the  trade  secret  privi- 
lege. However,  it  makes  clear  that  it  does  not  intend  to  comply  with  that  standard. 
The  Postal  Service  states,  repeatedly,  that  speculative  showings  of  competitive  harm 
should  be  sufficient.  See,  e.g.,  Statement  of  the  USPS  Concerning  Order  No.  1034 
at  8,  where  it  states 

.  .  .  much  Postal  Service  international  pricing  information  is  pubUcly  avail- 
able, and  it  is  very  difficult  to  identify  specifically  what  individual  pieces  of 
commercially  sensitive  information  could  be  combined  with  information  already 
available  to  damage  the  Postal  Service's  competitive  position. 
See  also  Postal  Service  Response  at  16-17. 

[  1098]  The  Postal  Service  offered  to  provide  some  of  the  information  compelled  by 
Order  No.  1025  if  unusually  restrictive  protective  conditions  were  established  under 
Rule  31a.  At  the  same  time  it  refused  to  provide  some  of  the  information  ordered, 
regardless  of  the  protective  conditions  that  were  made  available.  USPS  Motion  for 
Protective  Order  at  9.  Among  the  restrictions  proposed  by  the  Postal  Service  was 
a  procediu-e  in  which  it  would  decide  what  international  mail  data  would  be  pro- 
tected during  discovery. 

[1099]  To  revive  the  discovery  process,  the  Commission  authorized  the  requested 
procedure.  The  discovery  process  had  stalled  when  the  Postal  Service  objected  to 
having  public  disclosure  of  international  mail  data  determined  by  the  criteria  of  the 
Commission's  discovery  rules.  These  rules  authorize  discovery  of  any  information 
that  is  likely  to  lead  to  the  discovery  of  admissible  evidence.  Its  main  complaint  was 
that  FEC  did  not  actually  intend  to  use  those  data  in  this  proceeding.  The  Commis- 
sion therefore  agreed  to  let  the  Postal  Service  control  public  disclosure  of  inter- 
national mail  data  during  the  discovery  process.  The  Commission  allowed  pubUc  dis- 
closure after  the  discovery  process  to  be  determined  under  the  stricter  standards  of 
its  rules  of  evidence,  which  require  that  evidence  must  be  shown  to  be  material  to 
a  relevant  issue  in  order  to  be  made  part  of  the  public  record.  The  Postal  Service, 
however,  insisted  in  determining  for  itself  the  need  for  pubUc  disclosxu-e  of  inter- 
national mail  data  at  all  stages  of  the  proceeding.  Further  Comments  of  USPS  in 
Support  of  its  Motion  for  Protective  Order  Pursuant  to  P.O.  Ruling  R94-1/76,  (Sep- 
tember 15,  1994)  at  8-9. 

[1100]  The  Commission  preserved  the  right  of  intervenors  to  ask  the  Commission 
to  determine  if  the  trade  secret  privilege  actually  applies  to  particular  international 
mail  data.  The  Commission  rejected  the  Postal  Service's  position  that  it  could  take 
upon  itself  the  inherently  judicial  function  of  determining  the  conditions  under 
which  discovery  would  be  available  in  Commission  proceedings,  a  function  reserved 
to  the  Commission  by  39  U.S.C.  §  3624(b)(3).  Order  No.  1034  (October  24,  1994)  at 
3.  The  Postal  Service,  however,  insisted  on  reserving  that  function  to  itself,  and  ter- 
minated its  participation  in  discovery.  Statement  of  the  USPS  Concerning  Order  No. 
1034  at  9-10. 

[1101]  Future  procedural  reform.  FEC  contends  that  its  right  to  a  hearing  on 
the  impact  of  international  mail's  finances  on  domestic  mailers  was  largely  denied 
in  this  proceeding  by  the  Postal  Service's  unlawfvil  refusal  to  comply  with  the  Com- 
mission s  discovery  orders.  It  and  ACCA  urge  that  the  Commission  take  steps  to  en- 
sure that  the  Postal  Service's  defiance  of  lawful  Commission  orders  does  not  reoir 
in  subsequent  rate  cases.  FEC  Brief  at  26-27  and  ACCA  Reply  Brief  at  11.  The 
Commission  agrees  that  the  Postal  Service  has  failed  to  identify  any  legal  principle 
that  would  support  its  reftisal  to  comply  with  discovery  orders  regarding  inter- 
national mail.  It  also  agrees  that  the  procedxiral  impasse  that  has  prevented  a 

i*To  satisfy  applicable  legal  standards,  the  Postal  Service  would  have  to  demonstrate  that  dis- 
closing specific  international  mail  data  is  likely  to  cause  substantial  competitive  harm  of  a  spe- 
cific kind,  to  a  specific  international  service,  in  a  specific  international  market.  Such  a  showing 
would  require  the  Postal  Service  to  demonstrate,  for  example,  if  a  service  has  close  substitutes, 
if  participants  in  that  market  are  many  or  few,  if  the  Postal  Service  is  a  dominant  or  minor 
player,  if  entry  is  fi"ee  or  restricted  by  international  agreement,  etc.  Order  No.  1025  at  18-19. 


meaningful  hearing  on  these  issues  is  likely  to  reciu-  in  subsequent  rate  cases  unless 
a  rulemaking  is  undertaken  to  identify  minimum  documentation  requirements  for 
the  Postal  Service's  financial  forecasts  for  international  mail  that  should  accompany 
each  omnibus  Postal  Service  rate  filing. 

[1102]  The  Postal  Service  asserts,  without  analysis,  that  such  a  rulemaking 
"would  be  useful  only  for  regulating  international  rates,  which  is  beyond  the  Com- 
mission's jurisdiction."  Postal  Service  Reply  Brief  at  VII-8.  A  rulemaking  specifying 
the  minimum  level  of  documentation  required  for  the  Postal  Service's  forecasts  of 
costs,  volumes,  and  revenues  for  international  mail  would  be  tailored  to  the  purpose 
of  verifying  the  impact  that  international  mail's  costs  and  revenues  are  projected  to 
have  on  domestic  mail.  Requiring  the  Postal  Service  to  restore  certain  documenta- 
tion formerly  provided  for  its  international  mail  cost  and  revenue  forecasts,  and  re- 
quiring an  intermediate  level  of  cost  detail  for  basic  groups  of  international  services, 
would  not  impinge  on  the  prerogatives  of  the  Postal  Service  or  the  Governors.  In 
examining  the  basis  of  those  forecasts,  the  Commission  would  take  the  international 
rates  proposed  by  the  Postal  Service  as  a  given.  Any  corrections  the  Commission 
might  make  to  those  forecasts  would  be  made  solely  for  the  purpose  of  evaluating 
the  impact  that  the  international  rates  proposed  by  the  Postal  Service  are  likely  to 
have  on  the  revenues  and  costs  of  domestic  mail. 

Attachment  D 

joint  concurring  opinion  of  chairman  haley,  vice-chairman  folsom,  and 
commissioners  crutcher,  leblanc,  and  tyson 

In  the  principal  Opinion,  after  making  the  analysis  the  Act  requires  of  us,  we 
have  acceded  to  the  Postal  Service's  request  for  the  now-customary  treatment  of 

Erior  years'  losses  (PYL).  A  revenue  requirement  item,  here  totalling  $40  million,^ 
as  been  included  for  this  purpose.  We  have  declined  to  follow  a  suggestion  by 
Readers'  Digest  Association,  et  al.  (RDA  et  al.)  that  we  eliminate  PYL  recovery. 

No  one  should  infer  from  this  fact  that  we  are  satisfied  with  the  present  state 
of  the  PYL  revenue  mechanism.^  Indeed,  the  first  aim  of  the  joint  concurring  opin- 
ion is  to  convey  formally  to  the  Governors  our  dissatisfaction,  which  we  think  they 
ought  to  share,  with  the  way  it  is  now  administered.  It  appears,  and  indeed  has 
been  acknowledged  ,3  to  be  a  revenue  increment  requested  and  provided  by  us  for 
a  particular  pvupose,  but  not  necessarily  used  for  that  purpose.  It  would  not  be  sur- 
prising, in  view  of  this,  for  future  Commissions  to  be  most  reluctant  to  include  it 
on  sudi  a  basis. 

We  beUeve  the  original  PYL  concept  is  still  useful.  Our  analysis  of  it  in  Docket 
R76-1,  judicially  approved  following  Docket  R77-1*,  remains  satisfactory  so  far  as 
theory  is  concerned.  That  theory,  which  still  commands  Up  service  in  rate  proceed- 
ings, is  that  PYL  recovery  enables  the  Postal  Service  to  break  even  (as  §3621  re- 

» About  50  percent  of  this  stems  from  the  FY  1991  liability  imposed  by  the  Omnibus  Budget 
Reconciliation  Act  of  1990. 

2  In  principle,  this  mechanism  sums  the  net  losses  since  Reorganization,  and  amortizes  them 
over  a  set  period  (nine  years)  by  including  an  extra  line  item  in  the  revenue  requirement. 

3  The  following  colloquy  took  place  at  oral  argument  in  this  docket: 

Vice  Chairman  FOLSOM.  Is  it  your  position  that  once  we  have  given  the  revenue — and  usu- 
ally, your  revenue  is  earmarked  for  certain  purposes.  Right? 

Mr.  FOUCHEAUX  [for  Postal  Service].  Yes,  sir.  In  the  cost  estimates,  I  think  you  could  prob- 
ably say  that.  But  with  regard  to  the  contingency  or  the  prior  years  losses. 

Vice  Chairman  FOLSOM.  Well,  why  not  prior-losses?  That  is  to  retire  or  to  return  your  eq- 
uity. But  you  say  that  that's  just  another  contingency. 

That's  what  you're  saying.  Right? 

Mr.  FoucHEAUX.  No,  sir.  That's  not  what  I'm  saying.  That's  what  the  parties  challenging 
our  revenue  requirement  have  said,  and  that  may  be  even  what  the  Commission  implied  in  its 
last  opinion.  I  am  not  saying  that. 

I  am  saying  that  that  prior  years  losses  component  of  the  revenue  requirement  is  a  reason- 
able mechanism  which  enaoles  the  Postal  Service  to  retire  prior  years  losses,  which  are  probably 
associated  with  particular  components  of  our  cost  segments.  But  it's  very  difficult,  in  retrospect, 
to  go  back  and  track  the  losses  back  to  any  specific  cost  segment  or  component. 

Vice  Chairman  FOLSOM.  But  you  do  say — did  you  not  say  recently,  just  here  during  this 
dissertation,  that  you — the  Governors  have  the  right  to  take  the  contingency  and  the  prior  years 
losses  and  use  it  to  extend  the  rate  case  [cycle],  if  they  wish  to? 

Mr.  FoucHEAUX.  Postal  Service  revenues  are  accessible  to  the  Postal  Service  under  the  di- 
rection of  the  Board  of  Governors  to  use  as  Uiey  see  fit.  That's  what  Congress  intended,  and 
that's  well  within  the  limits  of  the  law. 
Tr.  47/24769-70. 

^National  Association  of  Greeting  Card  Publishers  v.  Postal  Service,  607  F.2d  392  (D.C.  Cu-. 
1979),  cert,  denied.  444  U.S.  1025  (1980). 


quires)  over  time.  Like  any  theory,  however,  it  becomes  subject  to  skepticism  if  the 
results  it  predicts  never  come  about.  The  Service  must  recognize,  as  well,  that  other 
important  circumstances  have  so  changed  as  to  make  its  present,  and  regrettably 
indefinite,  way  of  treating  PYL  a  serious  risk  for  it  and  those  who  depend  on  it. 
The  Postal  Service  stated  on  brief  in  this  case: 

It    was    reported    shortly    before    passage    of    the    0[mnibus]     B[udget] 
R[econciliation]  A[ct]  of  1990  that  although  it  met  the  federal  deficit-reduction 
target  for  FY  1991,  the  five-year  deficit- reduction  package  will  fall  $10  billion 
short  of  the  target  for  the  period  FY  1991  through  1995.  As  another  year  goes 
by  and  pressures  to  reduce  the  deficit  in  FY  1992  and  later  years  moimt,  it  is 
certainly  possible  that  the  Postal  Service  will  be  looked  to  for  contributions  be- 
yond that  imposed  by  the  1990  law. 
Postal  Service  Initial  Brief  at  1-9,  fn.  9.  Perhaps;  but  we  suggest  that,  rather  than 
merely  lamenting  this  prospect  and  exploiting  it  as  an  argument  against  intervener 
witnesses,  the  Postal  Service  take  its  own  prediction  seriously  and  reconsider  its  ha- 
bitual treatment  of  PYL. 

It  is  undeniable  that,  aft;er  14  years  in  place,  this  mechanism  has  not  (as  RDA 
et  al.  witness  Eden  observed)  restored  the  Service's  original  equity,  nor  indeed  made 
any  lasting  contribution  to  the  Service's  financial  strength.  While  we  do  not  wish 
these  observations  to  be  taken  as  prescribing  financial  or  accounting  practices  for 
the  Postal  Service,  a  duty  the  Act  does  not  place  on  us,  it  is  simply  a  fact  that  the 
existence  of  substantial  resources,  essentially  unaccounted  for,  has,  up  to  now,  been 
a  matter  of  concern  to  the  postal  community  and  no  one  else.  Mail  users  have  been 
able  to  assume  that  money  not  needed  for  the  stated  purpose  will  be  used  to  post- 
pone the  next  rate  increase.^  But  another  view  of  these  resources  is  not  only  pos- 
sible but  plausible  that  they  are  simply  extra  cash.  Postal  management,  as  its  rep- 
resentatives frequently  emphasize,  has  a  broad  statutory  discretion  to  file  rate  re- 
quests when  it  chooses.  39  U.S.C.  §  3622(a);  and  see  Postal  Service  Brief  at  1-5. 

PYL  recovery  16  the  clearest  example  of  a  stream  of  income  from  rates  and  fees, 
formally  designated  for  a  particular  institutional  purpose  which  is  nevertheless  as 
far  as  ever  from  accomplishment,  and  therefore  in  danger  of  being  regarded  as  no 
more  than  surplus  cash.  One  possible  answer  is  obvious:  establish  a  schedule  for  the 
actual  retirement  of  the  cumulative  losses;  give  it  priority  over  other  applications 
of  the  portion  of  income  attributable  to  PYL  recovery;  and  when  the  schedule  has 
been  met,  drop  the  PYL  item  from  rate-case  revenue  requests.  If  the  officially-ac- 
knowledged purpose  of  prolonging  the  rate  cycle  is  to  influence  revenue  requests, 
perhaps  it  too  should  be  subject  to  public  discussion — particularly  as  it  seems  not 
to  meet  with  the  approval  of  all  mailer  groups.  This  is  particularly  so  if  rate-cycle 
extension  is  not  the  declared  purpose  of  the  request.  While  we  have  concentrated 
on  PYL  recovery,  it  would  be  unrealistic  not  to  recognize  that  the  same  critical  view 
might  be  taken  of  balances  generated  by  the  contingency  provision,  even  though  by 
definition  this  cannot  be  earmarked  ahead  of  time  for  predetermined  objects.  Of 
course,  the  idea  that  the  contingency  too  might  and  perhaps  should  be  a  separate 
fund,  separately  accounted  for  to  the  Board,  has  been  frequently  discussed.^  The  ex- 
isting openended  treatment  of  these  funds  is,  in  short,  not  inevitable. 

Such  questions  as  these  say  arise  wherever  the  Service  is  seen  as  having  substan- 
tial discretionary  resources  collected  fi*om  mailers,  for  which  it  has  no  definite  plan 
of  future  use  and  whose  past  uses  it  cannot,  or  at  least  does  not,  give  more  than 
the  most  generalized  account.  Some  may  suggest  that  mechanism  which  make  this 
state  of  affairs  possible  comport  neither  with  the  breakeven  theory  underlying  PYL 
recovery  nor  with  the  statutory  mandate  for  postal  revenues  adequate  under  honest, 
efficient,  and  economical  management. 

George  Haley, 

Henry  R.  Folsom, 

John  W.  Crutcher, 

W.H.  Trey  LeBlanc  III, 

Patti  Birge  Tyson. 

Mr.  McHuGH.  Thank  you,  Mr.  Gleiman.  I  appreciate  those  com- 

^Indeed,  with  respect  to  the  contingency,  they  have  been  expressly  told  this.  PRC  Op.  R87- 
1  at  para.  2056,  citing  Postal  Service  testimony.  This  issue  is  of  course  separate  from  the  ques- 
tion whether  the  availability  of  essentially  nonaccountable  funds  also  leads  to  present  technical 
inefficiency  benefiting  no  one. 

®  It  was  discussed  in  the  hearings  in  this  proceeding. 


Just  as  an  informal  rulemaking  process  right  here,  we  do  not 
have  the  normal  5-minute  light  series  to  help  us  confine  ourselves 
to  reasonable  amounts  of  questions  and  answers. 

So  I  would  ask  the  Members,  as  we  rotate  down  through,  to 
please  hold  their  original  questions  to  somewhere  in  the  5  minute 
range.  And  I'm  sure  we'll  have  an  opportunity  to  go  through  a 
number  of  questioning  rounds,  so  that  everyone  has  as  much  time 
as  they  would  like. 

So  with  that,  let  me  just 

Mr.  Gleiman.  Mr.  Chairman? 

Mr.  McHuGH.  Yes,  Mr.  Gleiman. 

Mr.  Gleiman.  Before  you  start  with  your  questions,  if  I  could  re- 
spectfully request  that  my  entire  prepared  statement  be  placed  in 
the  record.  The  statement  that  I  gave  was  somewhat  summary  in 

Mr.  McHUGH.  Without  objection,  so  ordered.  Let  me  also  ac- 
knowledge gratefully  the  presence  of  two  Members  who  have  joined 
us.  On  my  left,  and  on  your  right,  the  gentleman  from  Indiana,  Mr. 
David  Mcintosh.  Welcome,  sir.  Thank  you  for  being  here. 

And  also,  on  my  right,  and  on  your  left,  the  gentleman  from 
Texas,  Mr.  Gene  Green.  Thank  you,  sir. 

You  described,  I  think  very  accurately,  the  intent  of  the  entire 
ratemaking  process,  to  somehow  instill  an  oversight  function,  par- 
ticularly in  those  areas  where  the  Postal  Service  has  been  granted 
a  monopoly  to  ensure  fairness  and  openness  to  all  of  those  involved 
in  Postal  Service  matters. 

It  has,  however,  been  15  years  since  those  broad  outlines  were 
established  in  the  1970  Reorganization  Act — 15 — that's  actually  25 
years,  isn't  it,  now  that  I  redo  my  math?  That's  why  I'm  in  politics. 

Would  you  have  any  thoughts  on  how  that  act  might  now  be 
amended,  either  to  facilitate  the  Postal  Service  in  the  job  that  it 
has  been  charged  to  do  or,  probably  more  appropriately,  allow  you 
to  more  effectively  and  efficiently  carry  out  the  mandate  with 
which  you've  been  charged? 

Mr.  Gleiman.  A  lot  of  what  one  might  do  in  the  way  of  statutory 
changes  depends  on  the  future  nature  of  the  Postal  Service,  that 
public  policy  question  that  I  posed  in  my  statement.  And  really,  I 
think,  until  the  Congress  deals  with  that  question,  there  are  a  lot 
of  other  issues  that  won't  fall  into  place  in  a  very  logical  manner. 

Having  said  that,  I  can  tell  you  that  I  firmly  believe  that  a  great 
deal  of  the  criticism  associated  with  the  nature  of  the  rate-setting 
process,  with  price  flexibility,  and  with  introduction  of  new  prod- 
ucts can  be  dealt  with  within  the  existing  law.  And  I  have  set 
about  to  work  with  the  Postmaster  (General  and  other  postal  offi- 
cials and  would  like  to  work  with  the  committee  in  achieving  some 
of  those  ends.  If  someone  were  going  to  change  the  current  law  to 
address  certain  issues  that  the  commission  was  concerned  about, 
perhaps  there  ought  to  be  some  requirement  for  more  ready  access 
to  Postal  Service  information  by  the  Postal  Rate  Commission,  a  re- 
quirement for  a  higher  degree  of  cooperation  by  the  Postal  Service 
with  the  Postal  Rate  Commission. 

And  perhaps  we  ought  to  be  given  standing  to  go  to  court  on  our 
own  to  defend  lawsuits  against  rates  which  we  propose  but  which 


the  Postal  Service  implements  and  which  the  Postal  Service  ulti- 
mately gets  sued  for  and  has  to  defend  against. 

Mr.  McHUGH.  I  take  it  from  your  testimony  that  you  have  deep 
concerns  about  the  quality  and  the  veracity  of  the  information  that 
you're  often  provided  in  these  matters.  Would  that  be  a  fair  judg- 
ment on  my  part? 

Mr.  Gleiman.  That  is  a  very  fair  statement,  Mr.  McHugh.  And 
I'll  tell  you  that  one  of  the  really  frightening  aspects  of  this  all  is 
that  in  the  last  rate  case,  a  goodly  number  of  major  mailers  who 
were  supportive  of  the  Postal  Service's  postal  rate  request  partici- 
pated in  the  rate  case  solely  to  establish  the  problems  and  concerns 
that  they  had  about  data  deficiencies  in  the  Postal  Service. 

And  let  me  say  that  frequently,  people  talk  about  how  much  time 
and  effort  and  money  go  into  collecting  this  data  for  rate  cases. 
Again,  you  know,  we  are  dealing  with  a  huge  government  monopoly 
and  a  lot  of  other  people's  money.  But  the  data  that  you  need  to 
collect  for  a  rate  case  is  the  same  exact  data  that  you  need  to  col- 
lect to  manage  the  Postal  Service.  You've  got  to  know  who's  doing 
what,  how  long  it  takes  to  do  it,  and  where  the  people  are. 

If  the  Postal  Rate  Commission  didn't  exist,  it  seems  to  me  to  be 
a  well-managed  organization,  the  Postal  Service  would  have  to  col- 
lect all  that  data  itself  and  would  have  to  know  what  its  costs 
were,  so  that  even  if  it  had  the  flexibility  to  set  rates  on  its  own, 
it  could  ensure  that  those  rates  were  set  above  costs  and  not  below 
costs  in  a  predatory  manner. 

Mr.  McHUGH.  So  you're  assuming  that  a  large  part  of  this  frus- 
tration and  the  lack  of  the  Postal  Service  being  forthcoming  is  be- 
cause they  just  don't  compile  the  data  in  a  professional,  responsible 
manner  on  a  regular  basis?  Or  do  you  think  there  is  a  more  nefar- 
ious factor  afoot  here?  Do  they  supply,  in  your  opinion,  bad  infor- 
mation in  an  attempt  to  skew  your  deliberative  process? 

Mr.  Gleiman.  I  don't  think  that  there's  anything  nefarious  un- 
derlying the  Postal  Service's  data  practices.  What  has  happened 
over  the  past  few  years — and  there  was  testimony  under  oath  in 
our  proceedings  by  Postal  Service  witnesses  that  there  has  been 
roughly  a — I'm  going  to  get  the  numbers  backwards,  and  I'll  correct 
them  for  the  record  if  I  do.  But  the  staff  associated  with  collecting 
data  and  compiling  and  analyzing  that  data  for  rate  purposes  was 
cut  by  about  30  percent  during  the  downsizing.  And  we  suspect  the 
amount  of  data  that's  collected  was  reduced  by  about  40  percent. 
When  you're  dealing  with  statistical  data,  you  can  run  into  prob- 
lems sometimes  when  you  don't  collect  enough  data  to  get  a  true 
picture  of  what's  going  on  in  your  little  universe. 

Also,  as  was  pointed  out  by  a  number  of  the  participants,  the  na- 
ture of  postal  operations  changed  significantly  in  recent  years.  I 
promise  to  finish  my  answer  in  time  for  you  to  be  able  to  vote.  But 
the  nature  of  postal  operations  itself  has  changed  with  automation 
and  with  other  changes;  for  example,  pallatization  of  flats  and  the 
like  and  drop  shipping.  The  people  who  used  to  be  collecting  mail, 
moving  mail  in  certain  ways,  no  longer  collect  and  move  that  mail 
in  those  certain  ways,  because  you  have  new  types  of  equipment 
and  new  kinds  of  systems. 

If  the  Postal  Service  doesn't  update  studies  so  that  it  knows  how 
many  people  it  has  got  doing  what,  it's  not  good  for  us,  it's  not  good 


for  the  mailers,  large  and  small,  and  it's  not  good  for  Postal  Service 

But  I  don't  think  there's  anything  nefarious.  I  just  think  that 
they  don't  view  it  as  a  particularly  high  priority. 

Mr.  McHuGH.  Which  you  would  suggest  reflects  on  their  ability 
to  manage  it  well  day  by  day? 

Mr.  Gleiman.  You  bet.  I  bet  you  if  you're  building  cars,  you  know 
what  your  d5mamic  inventory  is,  and  you  know  how  many  people 
you've  got  on  the  assembly  line  at  any  one  time,  and  you  know 
where  your  cost  centers  are. 

Mr.  McHuGH.  I've  used  up  the  time.  We  have  been  asked  to  vote 
on  a  rule — for  the  Members'  information,  H.R.  925.  I  learned  we 
can  get  over  there  easily  by  the  time  the  second  set  of  bells  ring. 

I  would  like  to  yield  to  the  chairman  of  the  full  Committee,  Mr. 
Clinger,  if  he  has  any  questions. 

Mr.  Clinger.  No.  I'm  here  to  learn. 

Mr.  McHuGH.  All  right.  Mr.  Green. 

Mr.  Green.  Mr.  Chairman,  thank  you.  I'll  try  and  be  brief.  I 
gfuess  because  I  have  a  lot  of  questions — and  if  we  could  submit 
questions  later  that  we  may  not  get  to  ask. 

We  heard  last  week  from  the  postmaster,  and  I  know  that  we 
talked  individually  with  both  the  postmaster  and  members  of  the 
Postal  Rate  Commission.  And  as  a  new  member  on  the  commit- 
tee— and  I  know  seeing  what's  called  "regulatory  lag,"  if  you're  a 
public  utility  in  an  individual  state,  I  would  be  interested  in  seeing 
how  we  can  shorten  that. 

I  know  in  your  testimony,  you  talk  about  some  reasons  that  are 
built  into  the  system,  the  10  months.  But  if  there's  any  suggestions 
on  how  we  can  do  that,  maybe  some  flexibility  in  allowing  the  Post- 
al Service  to  put  into  use  competitive  structures  that's  already  out 
there  by  the  private  business  and  in  looking  at  it  later — the  Postal 
Rate  Commission  looking  at  it  later,  so  they  may  be  able  to  re- 

There's  a  lot  of  questions  I  would  like  to  ask,  but  I  really  didn't 
want  to  take  up  the  time  of  the  committee  because  of  the  vote  com- 
ing up,  too. 

Mr.  Gleiman.  If  I  can  just  mention,  I  think  there  probably  is 
some  room.  We  found  a  way  to  shave  a  little  bit  of  time  out  of  the 
last  rate  proceeding.  There  are  some  people  who  don't  feel  you  have 
to  have  oral  arguments.  I  found  them  of  some  value  to  sharpen  my 
focus  on  the  issues. 

But  you  mentioned  other  regulatory  arenas.  And  let  me  tell  you 
that  the  Postal  Service  is  somewhat  different  in  a  sense.  It's  dif- 
ferent because — ^you  know,  if  PEPCO  or  VEPCO  or  Washington 
Gas  or  one  of  the  local  utilities  allows  a  rates  to  go  into  effect  be- 
fore the  end  of  the  proceeding  and  then  they  disallow  some  costs, 
they  have  got  good  customer  records,  and  they  can  go  back,  and 
they  can  give  you  a  refund. 

In  the  Postal  Service,  there  may  be  some  decent  customer 
records  for  the  largest  mailers.  But  for  your  constituents,  for  me, 
there's  no  way  once  we  plunk  down  that  money  for  a  stamp  at  the 
counter  that  we're  ever  going  to  get  it  back  later  on  if  the  process 


Mr.  Green.  I  understand,  but  I'm  talking  about  may  be  some 
functions  of  the  Postal  Service  that  may  be  in  competition — they 
may  have  privatization  issues  already  that  they  could  respond  to 
the  market.  I  don't  want  you  to  think  that  I  talked  about  the  32 
cent  stamp,  letting  them  go  and  put  it  into  effect  before,  but  other 
products  that  they  may  be  able  to  sell  and  to  utilize  to  help  support 
the  Postal  Service. 

Mr.  Gleiman.  Let  me  just  say,  this  is  an  interesting  question. 
And  I  understand  you're  throwing  out  some  ideas.  And  let  me 
throw  some  thoughts  back  to  you. 

There's  a  lot  of  talk  about  the  Postal  Service  being  able  to  price 
products,  having  the  flexibility  to  price  products  which  are  in  com- 
petition and  that  in  some  way,  this  is  going  to  help  the  Postal  Serv- 
ice overall.  If  the  Postal  Service  is  in  competition  with  somebody 
on  product  X — let's  take  Express  Mail,  for  example — and  they  get 
to  adjust  the  prices  downward  to  meet  what  they  view  as  the  mar- 
ket pressures,  if  they  get  down  to  the  point  where  they're  at  or 
below  cost  in  an  attempt  to  meet  the  market,  they  don't  make  any 
contribution  to  the  Postal  Service.  All  they  do  is  cover  the  cost,  if 
that,  of  that  particular  service. 

The  law  as  established  requires  each  type  of  mail  and  each  serv- 
ice to  cover  its  cost  and  make  a  contribution  toward  the  overhead 
of  the  Postal  Service.  The  overhead  of  the  Postal  Service  is  big,  $18 
billion.  And  if  the  Postal  Service  can  decide  that  a  significant  num- 
ber of  its  products  are  in  competition  and,  therefore,  adjust  rates 
lower  than  cost  to  meet  the  competition  and  not  make  a  contribu- 
tion, somebody  else  is  going  to  have  to  pick  up  that  part  of  the  $18 

Let  me  put  it  to  you  this  way.  First  class  mail  is  50  percent  of 
the  volume,  a  little  bit  more  than  that,  about  65  percent  of  the  rev- 
enue, and  covers  about  75  percent  of  the  overhead  cost  of  the  Post- 
al Service. 

If  you  take  all  those  products  that  the  Postal  Service  thinks  are 
in  competition  and  you  tell  the  Postal  Service,  "You  can  go  out 
there  and  lower  their  price  to  cost  or  below  to  meet  competition," 
that  overhead  that  is  paid  by  first-class  mailers,  the  letter  you 
mailed  to  me,  Mr.  Chairman,  inviting  me  to  the  hearing,  which  cost 
the  Congress  of  the  United  States  32  cents,  is  going  to  cost  more, 
because  they're  going  to  have  to  make  up  the  money  that  they  lose 
by  having  cost  or  below-cost  competitive  products. 

Plus,  you're  talking  about  a  Government  monopoly  competing 
with  private  companies. 

Mr.  Green.  Mr.  Chairman,  I  know  we  have  to  go  vote.  In  re- 
sponse, we  have  private  companies  who  want  to  compete  with  the 
government  monopoly.  And  that  road  goes  both  ways.  And  so  with 
that,  I  know  we  have  to  run  and  vote. 

Mr.  McHuGH.  Thank  you.  I  thank  the  gentleman.  The  gentleman 
from  New  York  has  said  he  has  one  quick  question  before  we  run 

Mr.  GiLMAN.  Thank  you,  Mr.  Chairman.  I  have  one  quick  ques- 
tion. I  would  ask  Mr.  Gleiman  to  be  brief,  if  he  would,  too. 

Mr.  Gleiman.  I'll  try. 

Mr.  Gilman.  The  Postmaster  General  has  been  calling  for  flexi- 
bility. Can  you  tell  us  why  you  couldn't  simply  index  rates  to  infla- 


tion?  Why  does  your  process  take  so  long?  And  what  have  you  done 
to  try  to  streamline  the  process?  If  you  could  try  to  give  me  a  quick 
answer  on  that. 

Mr.  McHuGH.  That  lets  you  know  why  New  York's  a  complex 

Mr.  Gleiman.  Let  me  have  about  2  seconds  to  collect  my 
thoughts.  Why  can't  you  just  index  rates  to  inflation?  Different 
products  have  different  costs  associated  with  them.  The  cost  of  han- 
dling different  types  of  mail  and  providing  different  types  of  mail 
service  do  not  move  in  lock  step.  Some  increase  more  than  others. 

If  your  indexed  rate  increases  to  general  inflation,  you  would 
wind  up  having  some  rates  that  would  perhaps  be  below  costs  be- 
fore it  was  all  over.  And,  as  a  matter  of  fact,  in  the  last  rate  case, 
if  the  Postal  Service  had  had  its  way,  it  would  have  shifted  78  per- 
cent of  the  overhead  costs  to  first-class  mail.  They  had  an  across- 
the-board,  below  inflation  proposal.  It  would  have  shifted  more 
costs  to  first  class 

Mr.  GiLMAN.  And  can  we  streamline  the  process  and  make  it 
move  quicker? 

Mr.  Gleiman.  If  the  Postmaster  Greneral  can  give  us  some  specif- 
ics about  what  he's  interested  in,  I'm  sure  we  can  work  with  him 
in  a  public  forum,  so  that  all  of  the  other  people  who  are  going  to 
be  affected  by  this  can  have  a  say,  also.  We  can  find  ways  to 

Mr.  GiLMAN.  And  do  you  have  any  recommendations  that  we 
should  consider? 

Mr.  Gleiman.  I  don't  off  the  top  of  my  head,  but  I  would  love  to 
have  some  discussions  with  you. 

Mr.  GiLMAN.  Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  I  thank  the  gentleman.  We're  going  to  streamline 
ourselves  over  to  the  floor.  And  we  will  reconvene.  I  hope  other 
Members  will  be  able  to  join  us  again,  but  if  not,  I  have  a  number 
of  questions  that  I  would  like  to  pose  to  the  panel.  So  I  appreciate 
your  forbearance,  and  we'll  be  back  as  soon  as  we  can. 


Mr.  McHuGH.  We  can  come  out  of  recess  and  get  back  to  work, 
because  the  schedule  throughout  the  day  is  not  likely  to  get  any 
more  accommodating  or  easier.  I  think  it's  important  that  we  recog- 
nize your  gentlemen's  valuable  time  and  proceed  as  quickly  as  we 

I  know  that  Mr.  Sanford  has  a  very  important  event  that  he  has 
to  take  part  in  in  the  near  future,  so  I  would  yield  to  him  for  any 
questions  he  may  have. 

Mr.  Sanford.  I've  got  two  quick  questions,  I  guess  one  is  follow- 
ing up  on  Mr.  Green's  question  on  regulatory  lag.  If  you  look  at  the 
Postal  Service — and  as  I  understand,  there's  a  negative  net  worth 
or  equity — I  guess  it  was  in  last  week's  hearings,  we  kept  hearing 
about,  "We  need  to  be  freer  to  do  a  lot  of  things  that  we  need  to 
do,  because  without  that,  it  impedes  our  ability  to  compete  in  the 

I  want  to  touch  again  on  why  shouldn't  they  be  free  to  set  their 
own  rates.  One  of  the  things  we  consistently  heard  about  was, 
whether  it's  with  Fed  Ex  or  other  competitors  that  did  go  into  a 
product  area,  by  the  time  they  could  get  their  rate  structure  ap- 


proved,  a  year  would  have  passed,  and  that  they  were  really  behind 
the  learning  curve  and  the  competitive  curve. 

Mr.  Gleiman.  Well,  let  me  mention  again  that  since  you  men- 
tioned Fed  Ex,  that  Fed  Ex  is  a  private  company.  The  U.S.  Postal 
Service  is  a  Government-granted  monopoly.  It  has  got  some  areas 
that  are  literally  outside  of  the  competitive  arena.  Roughly  85  per- 
cent of  its  revenue  is  monopoly  revenue.  And  there  is  a  basic  ques- 
tion here  about  how  much  flexibility  you  want  to  give  a  govern- 
ment monopoly  to  compete  with  private  business.  That's  one  issue, 
I  think,  that  people  have  to  think  about. 

As  far  as  the  alleged  1-year  lag — and  you  mentioned  the  equity 
issue,  also — let  me  just  tell  you  that  I  have  been  prepared  since  the 
day  I  walked  in  there  to  make  the  regular  rate-setting  process 
shorter  and  less  cumbersome  and  to  find  ways  to  let  the  Postal 
Service  roll  out  experimental  products  in  a  reasonable  manner  and 
experimental  rates  in  a  reasonable  manner.  By  reasonable,  I  mean 
protecting  everybod/s  rights  in  this  process. 

I  understand  that  a  number  of  Members  asked  for  specifics  last 
week  when  the  Postmaster  Greneral  was  up  here.  And  I,  too,  have 
asked  for  some  specifics.  It's  very  difficult  to  deal  with  this  area 
when  you're  talking  in  vague  generalities.  But  there  is  no  year  lag 
on  competitive  products. 

The  Postal  Service  decides  when  to  ask  for  a  rate  increase,  when 
to  ask  for  a  classification  change.  We  have  had  rules  at  the  Postal 
Rate  Commission  for  experimental  services  for  a  number  of  years 
now  on  the  books  that  provide  for  a  proceeding  that  can  last  no 
longer  than — it  can  be  less  than,  but  no  longer  than  5  months. 

For  5  years,  the  Postal  Service  had  a  rule  which  we  issued  in 
their  most  competitive  area,  which  is  Express  Mail,  which  allowed 
them  market  response  flexibility  in  no  more  than  90  days.  They 
never,  ever  used  that  flexibility  that  they  had  on  the  books.  The 
rules  sunset  last  August,  but  we  reissued  it  immediately  upon  com- 
pletion of  a  notice  of  proposed  rulemaking  after  the  big  rate  case 
was  over. 

And  I  think  it's  fascinating  that  an  entity  that  has  had  these 
shortcut  rules  available  to  it  has  not  made  use  of  them  and  is  in 
here  talking  in  vague  generalities  about  the  need  for  more  flexibil- 

But  again,  I  want  to  go  back  to  point  one,  which  was  the  under- 
lying issue  of  how  much  you  want  a  government  monopoly  to  be 
able  to  have  flexibility  to  change  rates  to  compete  with  private 
companies,  p>erhaps  doing  damage  to  them,  and  perhaps  causing  its 
monopoly  customers  who  can't  go  anywhere  else  to  pay  higher 

Mr.  Sanford.  One  other  question 

Mr.  Gleiman.  One  minute,  I  apologize  for  the  length  of  the  an- 
swers, but  I'm  kind  of  thinking  through  this  as  I'm  talking. 

You  mentioned  the  equity  position  of  the  Postal  Service.  The 
Postal  Service's  equity  position  is  in  its  control.  It  decides  when 
rate  cases  are  filed. 

The  Postmaster  General  has  made  a  big  deal  out  of  the  fact  that 
he  spread  the  rate  cycle  out  for  4  years.  It  usually  is  somewhere 
in  the  vicinity  of  3  years  or  it  has  been,  historically.  And  he  claims 
to  have  saved  rate  payers  $14.2  billion  dollars.  I've  scratched  my 


head  ever  since  I  first  heard  him  say  that  a  year  ago,  trying  to  fig- 
ure out  where  that  $14  bilHon  is.  As  best  I  can  tell,  delaying  a  rate 
case  for  1  year  saved  mailers  whatever  the  revenue  was  at  issue 
in  the  rate  case,  which  was  $4.7  billion,  not  14  point  something. 

But,  in  the  process  of  delaying  the  rate  case,  the  Postal  Service 
went  deeper  into  the  red.  Its  equity  position  deteriorated.  You  can't 
have  it  both  ways.  You  can't  say,  "Gee,  we  want  more  flexibility. 
We  want  to  do  things  when  we  want  to  do  them,  so  that  we  can 
have  a  better  equity  position  and  a  better  bottom  line,"  and  then 
spread  the  rate  cycle  out  for  an  extra  year,  go  in  the  red,  and  claim 
that  you  did  something  wonderful  for  people  and  for  the  Postal 
Service.  It  doesn't  wash. 

Mr.  LeBlanc.  Mr.  Sanford,  if  I  could  comment  just  1  second, 
please,  sir. 

Back  in  June  1992,  we  issued  Postal  Ratemaking  in  a  Time  of 
Change,  which  was  a  joint  study  that  was  done  by  some  sitting 
commissioners  at  that  time,  some  of  our  staff,  and  a  number  of 
Postal  Service  people  themselves  who  worked  many  hours  on  it. 

And  I  just  want  to  touch  on  one  thing  or  two  things,  very  quickly 
here,  to  give  you  an  idea.  You  talk  about  flexibility  and  so  forth. 
It  may  be  even  helpful  if  this  could  be  made  part  of  this  record 
today.  I  could  provide  this  copy.  I  believe  it's  a  clean  copy. 

Mr.  McHuGH.  Without  objection,  so  ordered. 

[The  information  referred  to  follows:] 


Postal  Ratemaking 

IN  A 

Time  of  Change 

A  Report  by  the 

Joint  Task  Force  on  Postal  Ratemaking 

submitted  to  the 

Board  of  Governors  of  the  United  States  Postal  Service 

and  the 
Postal  Rate  Conunission 

June  1,  1992 


June  1,  1992 

The  Honorable  Nonna  Pace 
Chainnan,  Board  of  Governors 
United  States  Postal  Service 
Washington,  D.C.  20260 

The  Honorable  George  W.  Haley 
Chairman,  Postal  Rate 

Washington,  D.C.  20268 

The  Joint  Task  Force  on  Postal  Ratemaking  trai«mits  herevdth  the  report 
you  have  requested  on  potential  improvements  in  the  postal  ratemaking  process. 
We  are  pleased  to  be  able  to  say  that  the  recommendations  in  the  report  represent 
a  consensus,  and  come  to  you  vs^ith  our  unanimous  endorsement.    We  trust  they 
will  be  helpful  to  the  Postal  Service  and  the  Postal  Rate  Commission  in  meeting 
the  challenges  of  the  future. 

ROBERT  Cohen 
Fred  Eggleston 
Henry  R.  Folsom 
Ira  D.  Hall 

Stephen  E.  Miller 
David  F.  Stover 
WiLLL\M  J.  Sullivan 
Patti  Birge  Tyson 


The  Joint  Task  Force  on  Postal  Ratemaking  was  created  to  recommend  to 
the  Postal  Rate  Comnnission  and  the  Board  of  Governors  opportimities  to  improve 
the  effectiveness  of  the  postal  ratemaking  process  which  the  two  agencies  should 
jointly  pursue.    Norma  Pace,  Chairman  of  the  Board  of  Governors,  suggested  to 
George  Haley,  Chairman  of  the  Postal  Rate  Commission,  that  each  of  them  name 
fovir  members  to  represent  their  respective  institutions. 

Beginning  work  in  January,  the  Task  Force  met  in  Washington,  D.C.,  six 
times  in  informal  but  intensive  two-day  working  sessions  and  in  several  other 
briefer  meetings.    The  panel  agreed  to  focus  on  corwensus  recommendatioi\s  which 
can  be  implemented  without  legislation,  and  which  encourage  the  USPS-PRC 
partnership  envisioned  by  Congress  in  adopting  the  Postal  Reorganization  Act  of 

Because  of  the  nature  and  speed  of  change  in  the  current  day  m2U'ketplace 
in  which  the  Postal  Service  operates  and  competes,  the  Task  Force  fovmd  a  need 
for  more  flexibility  in  pricing  by  the  Postal  Service,  a  need  for  greater 
predictability  of  prices,  and  a  continuing  need  for  full  accountability  in  postal 
financial  performance.    The  Task  Force  thus  recommends  that  p>ostal  ratemaking 
henceforth  be  based  on  a  four-year  rate  cycle,  with  estimates  for  the  entire  period 
presented  to  the  Commission  in  the  initial  rate  filing.    The  Commission's 
recommended  decision  would  provide  legally  implementable  rates  for  the  first  two 
years  of  the  cycle  and  project  expected  rate  levels  for  the  remaining  two  years.    A 
midcyde  case,  with  only  limited  matters  at  issue,  would  adjust  rates  for  actual 
experience  and  ensure  that  the  Service  break  even  over  the  whole  cycle.    The 
four-year  process,  as  described  in  Chapter  HI,  is  designed  to  provide  better 
matching  of  rates  to  marketplace  realities,  to  provide  more  predictable  rate 
inaeases  in  smaller  increments,  to  reduce  the  costs  of  the  ratemaking  process,  and 
to  improve  accountability  in  many  ways.    Among  the  expected  advantages  of  the 
new  procedure  is  a  reduction  of  the  scope  for  the  contingency  allowance  and  the 
recovery  of  prior  years'  losses. 


The  Task  Force  acknowledged  the  legitimate  need  of  the  Postal  Service  to 
resp>ond  in  a  timely  fashion  to  changing  market  conditions  and  therefore 
recommends  in  Chapter  IV  that  the  Postal  Service  have  more  latitude  in  pricing 
the  "competitive  classes"  of  mail  —  Express  Mail,  parcel  post,  and  heavy  weight 
Priority  Mail.    The  Task  Force  suggests  that  for  these  classes  the  Postal  Rate 
Commission  present  in  its  rate  recommendation  bands  of  rates  coi\structed  from  the 
highest  and  lowest  appropriate  markups,  leaving  flexibility  to  the  Postal  Service  to 
determine  the  actual  rates  for  each  subclass. 

The  Task  Force  also  recommends  coiisideration  of  a  system  of  "declining 
block  rates"  to  create  incentives  to  p>ostal  customers  to  increase  usage.    All  pieces 
in  the  initial  block  would  pay  the  same  rate,  but  as  volume  increases  a  rate 
benefit  would  be  provided. 

Innovation  in  the  development  of  new  postal  products  is  encouraged  by  the 
Task  Force  report  in  Chapter  V.    The  panel  recommends  the  following  new 
procedures:    (1)  accelerated  procedures  for  market  tests;  (2)  multi-year  cost 
recovery  for  new  service  introduction;  (3)  fast-track,  yes-or-no  review  for 
provisional  services;  (4)  expedited  review  of  service  agreements;  and  (5)  expedited 
minor  classification  cases. 

In  Chapter  VI,  the  Task  Force  report  emphasizes  the  need  for  improved 
communications  between  the  Postal  Service  and  the  Postal  Rate  Commission.    The 
group  found  that  strained  relationships  have  resulted  more  from  failures  to 
communicate  than  for  any  other  reasons  and  suggests  a  number  of  ways  the  two 
agencies  can  engage  in  creative  consultation.    The  Task  Force  recommends  that 
explanatory  materials  concenung  the  ex  parte  riiles  be  developed  in  order  to  avoid 
misimderstanding  and  overapplication  of  the  rules.    The  Task  Force  cilso  outiines 
ways  in  which  greater  understanding  and  electronic  accessibility  of  postal  data  can 


be  achieved,  including  publication  of  Postal  Service  data  in  formats  adopted  by  the 
PRC  in  the  previous  rate  case  and  crosswalks  for  postal  data. 

In  Chapter  Vn  the  Task  Force  lists  suggestions  and  recommendations  it  feels 
ai«  best  left  to  the  Postal  Service  or  the  Postal  Rate  Conuiussion  to  implement. 

The  Task  Force  strongly  recommends  inunediate  action  to  adopt  the  four 
year,  two-step  rate  cycle,  and  provision  for  rates  in  competitive  classes,  as  a  basis 
for  the  next  omnibus  rate  case.    The  report  outlines  a  feasible  schedule  in  Chapter 
Vin,  which  proposes  that  rulemaking  activity  commence  in  Jvme  and  conclude  by 
August  15,  1992.    Other  initiatives  would  be  taken  up  in  a  second  1992  phase. 
Following  the  next  rate  case,  the  Task  Force  suggest  the  Postal  Rate  Conunission 
hold  a  conference  to  explore  the  benefits  of  rulemaking  on  established  costing 

-  m  - 


Table  of  Contents 

Executive  Summary    i 

I.         Introduction    1 

n.        Integrated  Postal  Service  Framework .  5 

m.       A  Nev^  Model  for  Rate  Cases 10 

IV.  Competitive  Markets 39 

V.  Innovation  and  Market  Responsiveness    45 

VI.  Opportunities  for  Improved  Communication 56 

VII.  Proposals  Not  Addressed 62 

VIII.  Rulemaking  Implementation 67 

Appendix  —  Background  of  the  Joint  Task  Force 



Twenty-four  years  ago  the  President's  Commission  on  Postal  Organization 
called  for  the  conversion  of  the  Post  Office  Depju-tment  into  a  government 
corpxjration  to  operate  the  nation's  postal  system  on  an  efficient,  self-supporting 
basis.    Serious  breakdowns  in  mail  service,  despite  huge  taxpayer  subsidies,  had 
convinced  the  Kappel  Conunission,  and  ultimately  persuaded  the  Congress,  that 
the  nation's  mail  system  had  to  be  fundcunentally  changed.    From  the  intense 
national  postal  debate  of  1968-71  emerged  not  simply  the  Postal  Service,  but  also  a 
separate,  independent  ratemaking  agency,  the  Postal  Rate  Commission  (PRC). 

In  the  21  years  since  postal  reform,  massive  p)ostal  breakdowns  have  been 
avoided,  the  taxpayer  subsidy  to  the  Postal  Service  has  been  eliminated,  and 
double  the  mail  volume  is  being  handled  by  a  workforce  smaller  than  that 
employed  in  1971.    Employment  conditions  have  improved  significantly  for  the 
nation's  postal  employees.    A  professional,  non-political  management  cadre  has 
been  developed  to  address  what  the  Kappel  Commission  called  "a  management 
challenge  as  great  as  any  in  our  economy." 

Despite  singular  success  in  some  areas,  however,  the  nation's  postal  system 
today  grapples  not  only  with  the  problen\s  of  other  large  enterprises  at  a  time  of 
economic  uncertainty  and  changing  customer  needs,  but  with  unique  financial 
challenges,  some  of  which  derive  from  the  process  used  for  setting  postal  rates. 
While  the  management  of  the  mail  system  itself  is  the  responsibility  of  the  Postal 
Service,  the  Postal  Reorganization  Act  divides  authority  for  setting  rates  between 
the  Postal  Service  itself,  which  establishes  its  "revenue  requirement"  and  the  Postal 
Rate  Comnrussion,  which  determines,  after  a  full  hearing  on  the  record,  the 
appropriate  rate  to  be  charged  to  each  class  of  mail.    Unless  the  Postal  Service 
Governors  find,  by  unanimous  vote  and  on  the  basis  of  the  record,  that  the  rates 
recommended  by  the  PRC  will  not  provide  sufficient  revenue  to  operate  the  mail 
service,  the  Commission's  recommendation  may  not  be  altered. 


That  the  Governors,  as  a  body,  are  given  the  final  decision  on  the  revenue 
requirement  reflects  the  essentiality  of  the  national  mail  system  and  the  importance 
of  assuring  its  financial  health.    Provision  of  prompt,  reliable  an'^  efficient  ]x>stal 
service  has  been  a  federal  responsibility  for  over  200  years,  and  mdeed  is  one  of 
the  enumerated  powers  given  to  the  Congress  by  the  Constitution.    The  1970 
reform  act  shifted  to  the  mail  user  the  full  cost  of  what  was  to  become  a  self- 
supporting  postal  service,  but  reiterated  the  mandate  for  universal  delivery  and 
continued  the  historic  monojHsly  on  carriage  of  letters.    The  letter  mail  monopoly 
remains  an  important,  even  critical,  component  of  postal  financing.    The  American 
people,  as  taxpayers  and  ratepayers,  furthermore,  have  made  an  enormous 
investment  in  the  facilities,  staff  and  other  assets  of  the  postal  system,  and  it  is 
through  maximizing  the  productive  use  of  that  investment  and  gaining  revenue 
from  non-monopoly  services  that  rates  for  all  users  can  be  kept  as  low  as  possible, 
and  the  system  upgraded  to  meet  tomorrow's  needs.    The  Postal  Service, 
accordingly,  offers  many  services  not  protected  by  its  monopoly.    The  proper 
pricing  of  those  "competitive"  services  raises  difficult  p>olicy  and  technical  issues, 
but  need  not,  in  our  judgment,  be  as  rigidly  circumscribed  as  at  present. 

The  process  for  establishing  ptostal  rates  gives  all  parties  a  full  opportunity 
to  examine  and  challenge  the  costs  attributed  to  each  class  and  subclass  of  mail, 
the  methodology  used  to  establish  those  costs,  the  techniques  employed  to  project 
future  mail  volumes,  the  share  of  institutional  costs  each  type  of  mail  should  bear, 
and  related  matters.    The  process  has  some  of  the  features  of  public  utility 
regulation  practiced  at  the  state  and  federal  level,  but  is  unique  in  that  only  one 
entity  is  being  regulated.    It  also  imjwses  a  significant  degree  of  rigidity  on  the 
types  of  service  offerings  provided  by  the  Postal  Service,  since  the  way  postal 
services  are  defined,  as  well  as  their  prices,  are  subject  to  Conunission  review  and 

At  a  time  when  most  institutions  offering  services  to  the  public  are 
learning  to  respond  more  quickly  to  changes  in  market  conditions,  twenty-one 
years  of  administrative  and  judicial  precedent  have  added  to  the  complexity,  and 


inflexibility,  of  defining  and  pricing  postal  services.    Today,  the  defining  and 
pricing  of  postal  services  are  more  removed  from  the  control  of  postal  managers 
than  is  usual  even  in  regulated  industries,  imd,  pwrhaps,  more  removed  than  the 
statute  strictly  requires. 

The  PRC  was  envisioned  by  Congress  to  be  (in  the  words  of  the  Senate 
Report  accompanying  S3843)  "an  integral  part  of  the  postal  service,  ...  a  true 
partner  of  the  Board  of  Governors  in  every  aspect  of  postal  operations."    For  a 
variety  of  reasons  the  relationship  between  the  Board  of  Governors  and  the  PRC 
cannot  be  characterized  as  a  successful  partnership;  indeed,  for  most  of  the  last 
two  decades  the  relationship  has  been  adversarial.    Recent  signs  of  cooperation, 
however,  including  the  establishment  of  this  joint  Task  Force,  give  rise  to  the  hope 
that  a  new  partnership  of  policy  can  achieve  the  vision  of  the  architects  of  postal 

The  recommendations  presented  herein  are  intended  to  encourage  that 
partnership.    While  Congress  may  at  some  future  date  choose  to  revisit  the 
fundamental  ground  rules  governing  postal  rate  setting,  with  the  advantage  of 
over  two  decades  of  experience,  we  are  not  proposing  specific  legislative  changes 
at  this  time.    They  are  not  needed,  in  our  judgment,  for  the  improvements  we 
propose.    The  Postal  Reorganization  Act  gives  wide  latitude  to  the  PRC  to 
establish  fair  and  effective  procedures  for  administering  the  rate  setting  provisions 
of  the  Act.    It  is  within  this  latitude  that  the  proposals  we  recommend  can  be 

What  is  needed  for  these  changes  to  work  is  a  recognition  by  both  the  PRC 
and  the  Postal  Service  that  continued  communication  between  them,  and  a 
cooperative  approach  to  resolving  issues,  serves  the  public  better  than  excessive 
concern  for  individual  agency  prerogatives.  Their  independent  authority,  like  that 
of  the  three  branches  of  the  federal  government,  is  well  established:  the  conscious 
separation  of  powers  built  into  the  system  need  not  preclude  effective  cooperation 
toward  a  common  objective.    If  in  implementing  any  of  our  recommendations,  the 


two  agencies  should  encounter  any  adverse  interpretation  of  their  authority,  we 
consider  that  these  recommendations  are  each  imp>ortant  enough  for  both  agencies 
to  seek  legislation  to  confirm  the  authority  to  complete  the  suggested  reforms. 

The  members  of  the  Joint  Task  Force  on  Postal  Ratemaking  are  imanimous 
in  recommending  to  the  Postal  Rate  Commission  and  the  Board  of  Governors  the 
recommendations  set  forth  in  this  report. 

A  Note  on  the  Task  Force's  Procedure 

Although  the  schedule  of  the  Task  Force  did  not  allow  time  for  public 
hearings  or  the  solicitation  of  public  comment,  we  have  been  aided  greatly  in  our 
work  by  the  297  pages  of  comments  made  by  mailers  and  others  in  response  to 
the  Commission's  invitation  in  Docket  No.  RM91-1  and,  in  particular  to  the 
October  1991  report  of  the  Institute  for  Public  Administration.  We  have  not 
believed  it  appropriate,  moreover,  to  solicit  public  comment  on  our  sjjedfic 
recommendations  prior  to  presenting  them  to  the  Comnnission  and  the  Board  of 
Governors.    We  recognize  that  the  proposals  could  have  been  improved  by  the 
process  of  public  scrutiny  and  comment,  but  leave  that  essential  step  of  the 
process  to  the  two  agencies  who  sponsored  our  efforts. 



The  Task  Force  has  consciously  striven  to  relate  the  proposals  n\ade  in  this 
report  to  the  broader  context  of  the  postal  system  as  a  whole.    In  evaluating  a 
possible  reform,  we  asked  not  just  whether  it  made  sense  in  isolation  but  also  how 
it  would  fit  into  the  overall  goal  structure  of  our  Nation's  postal  system. 

In  this  connection,  it  is  useful  to  look  at  the  Postal  Service  from  three 
different  aspects:    (i)  as  a  provider  of  mail  services;  (ii)  as  the  institution  that  is 
the  employer,  the  owner  of  assets,  the  vendor  of  services,  and  the  like;  and  (iii)  as 
a  financial  entity  with  revenue,  expenses,  assets,  liabilities,  and  cash  flow. 

Each  of  these  three  aspects  suggests  a  different  set  of  objectives.    The  key 
objective  of  the  Postal  Service  as  a  provider  of  mail  services  is  to  provide  prompt, 
reliable,  efficient  services.    They  key  objective  of  the  institutional  Postal  Service 
should  be  to  become  and  remain  a  world-class  postal  service.    The  key  objective 
from  a  financial  integrity  perspective  must  be  reasonable,  predictable  prices  and 
sound  finandad  health.    Integrating  these  p>oints  of  view,  we  can  formulate  the 
comprehensive  goal  framework  as:    prompt,  reliable,  efficient  services  from  a 
world-class  quality  postal  service  with  reasonable,  predicable  prices,  and  sound 
financial  results.' 

'    Cutting  across  this  structure  of  goals  is  the  Postal  Service's  array  of 

•  Customers  —  who  mail  or  receive  over  500  million  items  each  day; 

•  United  States  Senate  and  House  of  Representatives  —  which  oversee 
certain  postal  matters; 

•  President  of  the  United  States  —  who  appoints,  with  the  advice  and 
consent  of  the  Senate,  Governors  of  the  Postal  Service  and 
Conunissioners  of  the  Postal  Rate  Commission; 


The  role  of  the  Task  Force's  recommendations.    We  believe  that  ovir 
recommendations  will  help  accomplish  three  instrvimental  goals: 

•  greater  flexibility  -  offering  customers  services  at 

reasonable,  justifiable  prices; 

•  more  predictability  -  giving  customers  a  better  idea  of 

prices  over  a  time  -  horizon  of  several 

•  greater  accountability       -         providing  full  disclosure  of  multi- 

year  projections  of  balanced  revenues 
and  costs  and  restoring  the  equity 

To  relate  these  instrvimental  goals  to  the  overall  goal  structure  described 
above,  we  must  recognize  that  there  are  several  major  components  of  each  asp>ect 
of  that  framework.    Some  of  the  key  components  of  prompt,  reliable,  efficient 
services  are: 

•  comprehensive  customer-based  project  coverage; 

•  prompt  customer-based  delivery  standards; 

•  reliable  delivery  performance  against  a  published  standard; 

•  high  customer  satisfaction  and,  where  applicable,  appropriate  and 
increasing  market  share. 

•  Postal  Service  employees  —  who  perform  the  Postal  Service's  many 
duties  and,  in  many  cases,  seek  career  opportunities  with  the  Service; 

•  Comp>etitors  —  who  have  a  vested  interest  in  Postal  Service  services, 
prices,  and  fair  cost  apportionment  methodology. 

The  Task  Force  represented  no  one  of  these  constituencies,  but  rather  the  United 
States  postal  system  as  a  whole. 


Key  components  of  a  world<lass  quality  postal  service  are: 

quality  processes  for  continuous  improven\ent; 

empowered  employees; 

comparably  compensated  career  opportunities; 

an  accountability  framework  for  fiiutndal  results; 

high  quality  results; 

robust  investment  efficiency  Qinking  automation  equipment,  real 

estate,  human  resource,  and  other  investment  productivity  measures). 

The  components  of  reasonable,  predictable  prices,  and  sound  financial  results 


•  price  increases  less  than  inflation; 

•  predictable  prices; 

•  fair  cost  apportionment  among  and  between  classes  of  mail  product 

•  planned  financial  results,  ultimately  based  on  a  twelve-month  module, 
with  full  asset  apportionment  and  recovery  of  past  deficits; 

•  a  financially  sound  equity  account. 

The  preeminent  challenge  for  the  United  States  postal  system  is  to  develop 
consensus  among  its  constituents  upon  the  mutually  shared  vision  and  to  gain 
concurrence  on  the  steps  needed  to  achieve  these  results. 

The  Postal  Service  has  begun  important  initiatives  in  many  of  these 
categories.     Its  strategic  plan  for  1991-95  includes  explicit  objectives  such  as  price 
increases  at  two  p>ercent  less  than  inflation,  the  institution  of  customer  input  into 
delivery  standards  and  geographic  boundaries,  the  use  of  an  independent 
measurement  in  determining  delivery  performance,  the  institution  and  expansion  of 
customer  satisfaction  documentation,  increased  attention  (where  appropriate)  to 
market  share,  the  beginning  of  a  quality  program,  the  automation  effort,  ongoing 


efforts  between  the  Postal  Service  and  the  Postal  Rate  Commission  to  insure  fair 
cost  apportionment  among  variovis  mail  categories,  and  other  related  activity. 

The  Task  Force  believes  that  its  recommendations  will  assist  in  the 
achievement  of  many  of  these  objectives.    In  particular,  the  Task  Force  addresses 
the  need  for  an  accountability  framework  for  financial  results  and  a  structural 
method  to  insure  dtat  price  increases  will  be  predictable  (and  hopefully  less  than 
the  rate  of  general  inflation).    It  still  remains  a  challenge,  however,  to  seek  and 
gain  consensus  of  the  key  constituents  in  our  postal  system  towards  a  "shared 
vision."    Each  constituency  may  be  expected  to  press  for  the  implementation  of 
certain  component  parts  of  this  total  integrated  framework.    The  problem  is  that 
sporadic  high  priority  attention  on  certain  items  may  advance  their  attainment  at 
the  expense  of  others.    This  can  motivate  prop>onents  of  the  other  items  to  press 
with  renewed  pwpose  for  their  agenda,  resulting  in  a  seesaw  oscillation  without 
overall  system  improvement.    The  Task  Force  hopes  that  its  discussion  of  these 
issues  will,  in  some  small  way,  help  stimulate  the  concept  of  a  "shared  vision." 

There  already  exists  a  great  deal  of  information  about  many  of  the  separate 
objectives  listed  herein,  but  one  item  about  which  we  wish  to  elaborate  relates  to 
"sound  financial  results."    We  believe  the  Postal  Service,  with  annual  revenue 
exceeding  $45  billion,  would  benefit  greatly  from  implementing  a  sound  discipline 
based  on  a  financial  plan,  appropriately  designed  to  secure  the  Service's  financial 
soundness  and  covering  both  operating  expenses  and  the  recovery  of  past  deficits. 
Such  a  plan  would  take  twelve  months  as  its  basic  module,  but  would  also  be 
appropriately  keyed  to  the  system's  -need  for  either  annual  or  somewhat  less 
frequent  rate  changes,  as  aUowed  for  by  the  four-year  strategic  rate  cycle. 
Inherent  in  our  proposal  is  the  development  and  publication  of  a  four-year  plan 
with  total  revenue  at  least  covering  all  costs.    The  current  system,  by  contrast,  has 
three  phases:    in  phase  1,  immediately  after  new  rates  go  into  effect,  revenue 
normally  exceeds  expenses;  during  phase  2,  the  Service  "breaks  even;"  and  in 
phase  3,  the  Service  loses  money.   The  proposed  system  would  facilitate  more 
standard  financial  practices  of  scrutinizing  the  relationship  between  the  statement 



of  revenue  and  expanse,  the  balance  sheet,  and  the  statement  of  cash  flow.    In 
particular,  the  Postal  Service  must  bring  some  soimdness  and  stability  to  its  equity 
account  which  is  currently  negative.    Success  in  this  area  will  require  both  a 
systemadc  change  in  the  way  rates  are  set,  cis  well  as,  the  discipline  to  implement 
practices  which  maintain  a  healthy  equity  account. 

In  summary,  our  key  objectives  from  a  financial  point  of  view  are  that  the 
Postal  Service  have  reasonable,  predictable  prices  which  increase  at  less  than  the 
rate  of  inflation,  that  its  price  structure  includes  full  recovery  of  its  costs,  including 
financial  obligations  to  current  and  past  employees,  that  the  equity  account  be 
brought  to  a  healthy,  positive  position;  that  Postal  Service  costs  and  expenses  be 
contained  so  that  the  Service  achieves  its  planned  financial  gocds  every  year;  and 
that  the  Postal  Service  management  publicly  disclose  its  longer  term  financial 
objectives,  including  annual  benchmarks,  and  establish  financial  targets  for  which  it 
is  held  accoimtable. 




A.      The  Problem;  Outline  of  a  Solution 

Overview.    The  Task  Force  was  asked  to  assess,  and  look  for  ways  to 
improve,  the  overall  effectiveness  of  the  ratemaking  process.    Among  the  most 
often  mentioned  alternatives  is  a  pattern  of  relatively  infrequent  omnibus  rate  cases, 
filed  on  a  predictable  schedule,  with  intermediate  updates  designed  simply  to  keep 
Postal  Service  costs  and  revenues  in  balance.    Recent  proposals  of  this  kind  are 
found  in  IPA's  The  Ratemaking  Proces^  and  in  the  outline  of  possible  changes 
prepared  by  the  Postal  Service's  legislative  working  group.    Similar  ideas  were 
suggested  as  long  ago  as  1988,  by  PRC  Chairman  Janet  D.  Steiger  and  Postal 
Service  Governor  Ira  D.  Hall.'    The  Task  Force  concluded  that  it  would 
recommend  a  variation  of  these  proposals  as  a  way  to  deal  with  some  of  the 
serious  problems  addressed. 

Our  recommendation  is  for  a  four-year  rate  cycle,  with  estimates  for  the 
entire  period  presented  to  the  Commission,  and  a  recommended  decision 
providing  rates  for  the  first  two  years  of  the  cycle  and  projecting  (but  not 
formally  recommending)  rates  for  the  remaining  two  years.    The  Postal  Service's 
initial  request  would  indicate  the  desired  frequency  (annual,  bieimial,  or 
qiudrennial)  of  changes  in  rates  for  the  different  categories  of  mail,  and  woxild 
commit  the  Board  of  Governors  to  implementing  these  changes  "not  earlier 

'    Institute  of  Public  Administration,  The  Ratemaking  Process  for  the  United 
States  Postal  Service  (October  1991)  at  9-10. 

'    Speech  of  Janet  D.  Steiger,  Chairman,  Postal  Rate  Commission  before  84th 
National  Convention  of  National  Association  of  Postmasters  of  the  United  States, 
Virginia  Beach,  Virginia,  October  19,  1988  at  8-10;  Remarks  of  Governor  Ira  D.  Hall 
to  fite  Board  of  Governors,  Springfield,  Missouri,  June  8,  1988. 



than"  a  given  date  in  each  year  for  which  a  change  Is  scheduled.    A  midcyde 
case  would  validate  or  adjust  the  earlier-projected  rates  for  the  remaining  years 
of  the  four-year  cycle,  and  with  issues  limited  to  experienced  cost,  volume,  and 
revenue  levels  and  rate  adjustments  appropriate  to  reflect  them.    The  midcyde 
case  would  thus  allow  no  revisiting  of  cost  attribution  or  attribution  methods, 
volume  estimating  methods,  pricing  polides  or  other  factors  affecting 
assignment  of  institutional  costs,  and  no  classification  changes  would  be 
litigated  or  recommended. 

This  change  in  rate-case  treatment  —  which  we  believe  can  be  carried  out, 
if  the  Board  and  the  PRC  dedde  it  should  be,  with  no  need  for  new  legislation  — 
promises  a  number  of  improvements  over  present  practice.    Before  describing  in 
detail  how  it  would  work,  we  review  some  current  problems  and  show  how  it 
could  alleviate  them. 

Postal  ratemaking  in  an  environment  of  change.    From  the  standpoint  of 
rate-case  practice*,  one  of  the  main  determinants  of  the  issues  and  the  results 
reached  is  the  use  of  the  rqneseniaiive  test  year.    As  our  study  of  the  problems  of 
present-day  (>ostal  ratemaking  progressed,  we  saw  increasingly  dearly  that  the 
test-year  model  may  be  less  advantageous  today  than  when  the  system  was  set  up 
twenty  years  ago. 

*    By  this  phrase  we  mean  the  dedsionnuiking  structure  of  general  rate  cases 
as  prescribed  by  PRC  rules  of  practice  and  as  reflected  in  Postal  Service  requests 
and  the  testimony  and  legal  arguments  of  the  Service  and  other  partidpants.    It 
excludes  (i)  the  substantive  law  of  ratemaking  (e.g.,  the  requirement  that  each  class 
cover  attributable  cost,  or  the  instruction  to  consider  economic,  sodal,  cultural,  and 
informational  value  to  the  redpient  in  assigning  institutional  costs),  and  (ii)  the 
distribution  of  authority  (or  "jurisdiction")  between  the  PRC  and  the  Governors. 
"Rate-case  practice"  thus  has  an  important  role  in  determining  what  issues  are 
properly  before  the  tribunal  for  decision  in  a  general  rate  proceeding. 



Use  of  a  test  year  is  widespread  in  utility  regulation.    Its  theoretical  basis  is 
that  for  practical  ratemaking  purposes  oosts^  and  revenues  can  be  balanced 
adequately  by  examining  a  segment  of  time  rqjresentative  of  the  longer  period  during 
which,  it  is  anticipated,  the  rates  in  question    fill  be  effective. 

It  is  easy  to  see  the  practical  advantages  of  this  procedure.    It  limits  the 
sheer  volume  of  data  the  parties,  and  the  ratemaking  agency,  must  handle.    By 
determining,  in  advance,  what  dte  test  year  will  be  under  any  given  set  of 
circumstances  of  filing,  the  agency's  rules  eliminate  a  great  deal  of  litigation  over 
what  data  must  (or  must  not)  be  considered  in  fixing  rates.    A  prospective  test 
year  technique  like  the  PRC's  helps  assure  that  in  times  of  significantly  changing 
costs  the  rates  will  not  be  obsolete,  in  terms  of  cost  recovery,  by  the  time  they  are 

The  question  is  therefore  not  whether  a  prospective  test  year  system  is  a 
"good"  one,  but  whether  it  is  well-adapted  to  the  historical  situation  of  the 
industry  concerned.    The  imswer  to  this  question  nuiy  change  over  time,  and  in 
the  postal  case  there  is  reason  to  think  it  has. 

Changes  in  cost  of  service  can  take  more  than  one  form.    Costs  can  rise  (or 
decline)  more  or  less  steadily  over  an  extended  period  of  years,  without  major 
planned  or  foreseeable  changes  in  the  scope  or  direction  of  the  change: 

*  Including,  in  the  case  of  a  for-profit  firm,  a  reasonable  return  for  its 

*  See  American  Public  Power  Association  v.  FPC,  522  F.2d  142,  146  (D.C.  Cir. 

.  .  .  Thus,  while  historical  test  year  ratemaking  may  have  produced 
"just  and  reasonable"  results  in  times  of  relative  price  stability,  it  may 
not  produce  such  rates  under  rapid  inflation.  .  .  . 

The  case  involved  the  Federal  Power  Commission's  first  future  test  year  rule  for 
electric  utilities,  promulgated  in  1973. 



■n  e  Tcst- 







12             3              4 




In  this  situation,  which  appears  to  have  been  the  one  anticipated  in  the  early  1970s 
when  current  rate-case  practice  was  in  its  formative  staged  a  prospective  test  year 
system  can  be  expected  to  work  well.   But  this  is  not  the  only  possible  pattern  of 
change,  and  we  have  reason  to  think  it  is  not  the  one  that  applies  to  today's  Postal 
Service.  We  cannot  always  expect  costs  to  change  monotonically,  or  in  constant 
proportions,  or  even  in  the  same  direction.  A  number  of  forces  can  make  cost 
changes  more  "disorderly":  introduction  of  important  new  technologies,  drastic  shifts 
in  the  customers'  need  for  the  different  services  offered,  and  increases 

. . .  The  first  step  in  regulating  utility  rates  is  usually  the  determination 
of  the  "cost  of  service"  for  a  recent  twelve-month  period.  While  some 
allowance  may  be  made  for  anticipated  changes  in  cost,  it  is  usually 
assumed  that  the  relationship  between  accounted^or  cost  and  revenue  sales  for 
a  particular  past  year  will  be  characteristic  of  the  near  future  and  urill  provide 
an  adequate  test  of  whether  rates  are  too  high  or  too  low. 

President's  Commission  on  Postal  Organization,  Towards  Postal  Excellence,  Annex  H, 
"Rates  and  Rate-Making"  (Foster  Associates),  §  3.41  (emphasis  added). 



or  changes  in  the  source  of  competitive  challenge  are  three  that  come  immediately 
to  mind.    If  change  is  driven  by  factors  like  these,  rather  than  by  "general 
inflation"  or  gradually  increasing  demand  for  an  unchanging  service  supplied 
using  established  methods,  ratemaking  on  a  representative  test  y.  ar  model  —  even 
if  the  test  year  is  prospective  —  may  give  less  than  ideal  results,  simply  because  it 
is  much  less  probable  that  any  given  year  will  be  truly  representative  of  a  longer 
fjeriod  within  which  it  falls. 

It  is  likely  that  a  historical  setting  in  which  costs  behave  in  the  "disorderly" 
fashion  just  outlined  will  also  be  one  in  which  managements  devote  extra  attention 
to  planning  and  forecasting.    To  the  extent  that  rapid  changes  in  costs  will  result 
from  actions  (such  as  the  widespread  installation  of  new  technologies)  initiated  by 
the  firm  itself,  extensive  planning  activity  is  almost  self-evidently  necessary.    The 
activities  of  competitors,  while  in  themselves  more  difficult  to  forecast,  can  still  be 
intelligently  guessed  at,  and  plans  made  to  counteract  or  adjust  to  them.    More 
generally,  increased  intensity  and  complexity  of  change  in  a  business  environment 
can  be  expected  to  elidt  greater  efforts  to  influence,  or  foretell  and  provide 
against,  the  effects  of  the  change:    that  is,  more  planning  activity. 

Combining  these  two  notions  —  the  lesser  likelihood  of  a  test  year's  truly 
representing  an  extended  future  period  when  cost  changes  are  rapid  and  complex, 
and  the  likely  availability  of  more  comprehensive  planning  work  by  the  regulated 
firm  —  suggests  that  better  ratemaking  may  result  from  using  an  explicit  multiyear  "test 
period"  conterminous  with  the  projected  lifespan  of  the  rates  being  proposed.    This  is  one 
of  the  main  features  of  the  Task  Force  recommendation,  and  from  the  structural 
standpoint  of  rate-case  practice  is  the  biggest  single  change  we  propose. 

Regularization  of  rate  changes  under  revised  rate  case  procedures.    The 

theory  of  the  representative  test  year  also  can  be  thought  of  as  entauling  an 
intertemporal  averaging  of  costs,  volumes,  etc.,  as  a  step  in  reaching  a  suitable  rate 
schedule.    In  the  archetypal  test  year  situation  (i.e.,  steady,  imeventful  growth)  it  is 
acceptable  to  spread  aggregate  cost  recovery  over  a  period  greater  than  the  test 



period.   Perhaps  costs  will  be  somewhat  over-recovered  early,  and  under-recovered 
later;  but  in  a  "steady-state"  enterprise  it  is  easy  to  dismiss  this  as  relatively 
uinimportant  so  long  as  the  rate  schedule  meets  legal  and  financial  requirements 
over  its  life  as  a  whole. 

Where  each  year  in  the  rate-case  cycle  can  present  a  substantively  different 
picture,  this  model  may  cease  to  be  acceptable.    Costs  "over-recovered"  from  a 
customer  group  at  time  T  may  never  be  "given  back"  at  T',  simply  because  those 
customers  have  in  the  meantime  shifted  to  a  comf>etitor.    Rates  set  on  a 
generalized  expectation  of  increasing  costs  may  turn  out  to  be  unsuitable  for  a 
dass  of  service  in  which  the  firm  introduces,  at  a  later  (post-test-year)  pwint  in  the 
cycle,  radical  cost-saving  technology.    When  inside-the-cyde  changes  like  this  are 
probable,  a  complete  cyde  becomes  the  more  appealing  interval  over  which  to  try 
to  match  rates  to  costs. 

The  corollary  is,  of  course,  that  even  if  the  general  rate  case  satisfactorily 
determines  what  all  the  relevant  costs  and  volumes  will  be  for  the  rest  of  the  cycle, 
establishing  one  set  of  rates  to  last  the  whole  cycle  "wastes"  much  of  the  information  so 
developed.    If  it  is  dear  that  the  cost  of  one  service  category  will  rise  in  line  with 
total  costs,  while  that  of  another  will  rise  in  that  way  initially  but  then,  when  a 
new  technology  becomes  operative,  decline  sharply,  economic  intuition  suggests 
trying  to  make  the  rate  for  the  second  category  —  at  least  —  reflect  that 

There  are  other  reasons  for  wishing  to  make  rate  changes  more  frequent 
than  onmibus  rate  decisions,  though  still  governed  by  those  dedsions.    First,  and 

*    This  flexibility  in  dealing  with  differential  change  during  the  rate-case  cycle 
is  one  reason  that  we  do  not  recommend  an  indexing  mechanism.    Bridging  the 
gap  between  omnibus  rate  cases  by  mechanically  adjusting  rates  in  accordance 
with  the  Consumer  Price  Index  or  some  similar  standard  has  the  merit  of 
simplidty,  but  fails  to  reflect  the  complexities  which  are  a  prindpal  reason  for 
departing  from  the  represe?5tative  test  year  model  in  the  first  place. 



evidently  of  mudt  significance  from  the  customer  viewpoint*,  the  increases  will 
individually  be  smaller.    Since  most  mail  is  an  input  to  other  economic  activity'",  it 
is  easy  to  see  the  force  of  the  proposition  that  smaller  variations  in  its  price  would 
cause  less  eamomic  disruption. 

Complaints  about  die  present  system  focus  not  just  on  the  size  of  the 
increases  but  on  their  comparative  unpredictabUity.    While  it  is  generally  assimied 
that  a  rate  cycle  will  last  approximately  three  years",  this  time  span  is  not  an 
explicit  part  of  the  Postal  Service  request.    Accordingly,  mail  users  (especially 
business  users  attempting  to  formulate  operating  budgets  in  which  postage  is 
important)  face  two  obstacles:    (i)  the  timing  of  increases  cannot  be  relied  on  with 
any  precision,  and  (ii)  increases  because  they  are  infrequent,  tend  to  be  relatively 
large  so  that  an  error  in  forecasting  their  tinting  or  size  can  be  particularly 

Relationship  to  the  contingency  provision.    The  indeterminate  length  of  the 
rate  cycle  under  current  practice  does,  on  the  other  hand,  allow  for  postponement 

'    See  PRC  Docket  No.  RM91-1,  Comments  of  Council  of  Public  Utility 
Mailers  at  2;  Conunents  of  Dr.  John  Haldi  at  3-50. 

"    According  to  the  Postal  Service's  1987  Household  Diary  Study  at  IV-2,  Table 
4-1,  for  example,  41  percent  of  Pirst-Class  Mail  is  sent  by  businesses  to  households, 
and  36  percent  by  business  to  other  businesses. 

"    This  has  not  always  been  true.    The  intervals  between  requests  for  general 
rate  changes,  since  postal  reorganization  have  been: 

Between  and  Interval  (months) 


















of  increases  if  funds  are  available  to  finance  the  postponement.    The  Postal  Service 
has  stated  that  revenues  earned  by  virtue  of  the  contingency  provision  authorized 
by  §  3621,  to  the  extent  not  required  by  unforeseen  adverse  events,  can  be  and  are 
used  to  delay  the  next  rate  filing."    Over  a  period  of  years,  this  practice 
presumably  does  reduce  the  customer's  total  jxKtage  bill.    It  does  not  alleviate 
either  the  customer's  planning  problem  or  the  difficulties  created  by  the  sheer  size 
of  the  inaease  when  it  does  occur. 

A  substantijdly  predetermined  schedule  of  rate  increases  should  also  have 
the  effect  of  reducing  the  absolute  amount  of  the  contingency  provision.    With  a 
predetermined  rate  change  timetable.  Postal  Service  financial  planners  would  find 
themselves  able  (and  no  doubt  would  be  under  some  pressure)  to  reduce  the  level 
of  the  contingency  provision.    If  this  came  about,  the  somewhat  indeterminate 
benefit  mailers  now  receive  from  the  Service's  ability  to  stretch  the  cycle  would 
not  be  lost,  or  entirely  lost;  it  would  simply  reappear  in  the  form  of  a  reduced 
total  revenue  requirement." 

"    See,  e.g.,  testimony  of  Postal  Service  witness  Stephen  P.  Dargusch,  Docket 
R87-1,  USPS-RT-1  at  13;  PRC  Op.  R87-1,  para.  2056;  PRC  Op.  R90-1,  Joint 
Concurring  Opinion,  passim.    It  might  seem  that  the  provision  for  recovery  of  prior 
year  losses  (PYL)  would  be  subject  to  the  same  treatment.    Theoretically,  it  should 
not  be,  since  unlike  the  contingency  it  is  designed  to  recover  a  specific  amount 
over  a  known  period  of  years.    It  has  been  argued,  however,  that  since  the 
accumulated  past  losses  have  not  in  fact  been  offset  on  this  schedule,  there  is  no 
practical  difference  between  the  PYL  item  and  the  contingency  provision.    See  PRC 
Op.  R90-1,  paras.  2046-51  (discussing  arguments  advanced  by  Reader's  Digest 
Association  et  al). 

"    A  slightly  different  problem  is  presented  by  the  PYL  recovery  item. 
Unlike  the  contingency  provision,  this  is  not  an  explicit  statutory  (§  3621)  "cost," 
but  a  method  for  restoring  financial  stability  by  amortization  of  accvmiulated 
deficits.    It  has  been  argued  that  in  fact  it  is  failing  to  do  so  and  should  therefore 
be  eliminated.    In  the  last  rate  case,  the  Commission  rejected  this  argument,  but 
expressed  concern  over  the  facts  underlying  it.    PRC  Op.  R90-1,  Joint  Concurring 
Opinion.    It  should  be  possible,  given  an  explicit  financial  plan  for  the  rate  cycle 
and  a  predetermined  rate  change  schedule,  actually  to  retire  the  accumulated 



Transaction  costs.    It  is  commonly  said  that  the  current  process  is  too 
costly.    While  few  figiires  are  available  as  to  the  cost  of  participation  (and  those 
have  been  subject  to  debate),  it  is  dearly  in  the  public  interest  to  reduce  the 
overhead  represented  by  rate  litigation.    One  way  to  restrain  litigation  costs, 
without  sacrificing  procedural  protections  built  into  the  Postal  Reorganization  Act 
is  to  structure  ratemaking  so  that  issues  are  not  raised  and  litigated  more  often 
than  necessary.    The  present  system  treats  each  rate  case  as  a  fresh  controversy  — 
to  be  influenced  and  often  governed  by  precedent  (provided  the  precedents  are 
not  overborne  by  the  challenges  participants  often  make),  but  fundamentally  based 
on  the  evidentiary  record  of  that  case  —  and  tends  to  promote  such  repetitive 

The  main  purp>ose  of  adjusting  rates,  of  course,  is  to  enable  the  Postal 
Service  to  break  even  over  a  reasonable  span  of  time.'*   If  rate  cycles  are  made  to 
correspond  to  the  Service's  financial  planning  cycle  it  should  be  sufficient  to 
establish  the  basic  structure  of  volume  estimation,  cost  attributions,  and  pricing 
determinations  at  the  outset,  and  limit  most  other  intracyde  litigation  to 
maintenance  of  the  basic  finandal  balance.    The  midcyde  case  can  thus  be 
relatively  short  and  simplfe.    While  certain  strictly  revenue  requirement  issues  have 
been  litigated  in  recent  rate  cases,  they  have  not  proved  unmanageable.    Moreover, 
much  of  the  dispute  has  arisen  from  the  present  indefiniteness  of  the  rate  cyde 
and  the  finandal  devices  that  interad  with  it.    As  suggested  above,  much  of  this 
indefiniteness  would  be  eliminated  under  the  Task  Force  recommendation. 

Summary.    The  Task  Force  is  recommending  adoption  of  a  four-year  rate 
cyde  with  an  abbreviated  midcyde  case  for  adjustment  purposes: 

"    National  Association  of  Greeting  Card  Publishers  v.  U.S.  Postal  Service,  607  F.2d 
392,  425  (D.C.  Cir.  1979),  cert,  denied,  444  U.S.  1025  (1980). 



The  Postal  Service  finds  itself  in  a  more  rapidly  changing  environment  —  in 
terms  of  technology,  customer  demand,  and  competition  —  than  prevailed 
when  the  present  system  was  created  in  the  1970s. 

In  particular,  cost  changes  are  likely  to  be  "disorderly"  rather  than  steady 
and  imiform;  costs  of  one  class  may  be  lowered  (by  installation  of  new 
technology,  for  example),  while  others  rise  (perhaps  because  of  changes  in 
mail  mix). 

The  Postal  Service  can  be  expected  to  respond  to  these  changes  through 
more  intense  planning  and  forecasting  efforts  —  which  can  be  usefully 
employed  not  only  by  its  management  but  also  by  the  ratemaking  process. 

Postal  customers  stand  to  benefit  from  a  ratemaking  system  which  replaces 
the  current  indefinite  cycle  and  relatively  large,  if  infrequent,  increases,  with 
a  substantially  predetermined  timetable  of  rate  changes  occurring  in  smaller, 
more  frequent,  stepw. 

An  explicit  rate  cycle  could  enable  the  Service  to  reduce  the  resources  that 
appear  in  rate  cases  as  large  nonaccrued  cost  items:    the  contingency 
provision  and  the  provision  for  recovery  of  prior  year's  losses. 

With  an  omnibus  rate  case  only  every  four  years,  rather  than  approximately 
three  years,  a  saving  in  transaction  costs  is  possible.    The  midcyde  case 
would  be  limited  in  scop)e,  with  the  most  contentious  ratemaking  issues 
excluded  and  even  the  revenue  issues  likely  to  be  somewhat  simpler  than  at 


B.      How  It  Would  Work 

The  Task  Force  is  recommending  a  new  format  for  rate  cases,  in  which  an 
explicit  four-year  period  is  treated  as  an  entirety,  with  data  and  estimates  for  the 
whole  period.    A  midcyde  case,  strictly  limited  in  scope,  would  enable  the  Service 
to  stay  on  the  financial  course  charted  in  the  initial,  omnibus,  case.    Rate  changes 
would  be  scheduled  in  advance  and  occur,  in  smaller  steps  than  are  now  taken, 
more  than  once  during  the  rate-case  cycle.    The  pattern  of  rates  and  interdass  rate 
relationships  established  in  the  initiating  case  would  be  expected  to  govern 
throughout  the  cyde.   This  pattern,  however,  may  have  changes  designed  into  it. 
A  demonstration  in  the  initial  case  that  cost  configurations  or  other  determining 
factors  should  be  expected  to  change  in  the  course  of  the  cyde  should  be  reflected 
in  the  pattern  of  rates  reconunended. 

In  what  follows,  we  discuss  details  of  how  such  a  system  might  be  put  into 
effect.    We  also  describe  some  other  solutions  we  considered  but  dedded  not  to 

An  explicit  four-year  cyde  is  the  cornerstone  of  the  reconunendation. 
Earlier,  we  drew  a  contrast  between  this  cyde  and  the  present  representative  test 
year  mechanism,  and  outlined  the  possible  benefits  from  making  the  change.    But 
besides  eliminating  the  indeterminateness  of  the  "inter-test-year"  periods, 
characteristic  of  the  present  system,  our  proposal  also  contemplates  a  more  explidt 
showing  of  what  longer-run  policies  (operational  as  well  as  finandal)  the  filing  is 
designed  to  further  and  how  it  would  do  so. 

Presenting  the  policy  background.    Accordingly,  we  believe  one  integral 
part  of  a  Postal  Service  rate  request  imder  the  four-year  cyde  plan  must  be  a 
presentation  by  a  senior  policymaking  officer  of  the  Postal  Service  —  appearing 
as  a  "policy  witness"  —  to  make  dear  the  policies  to  which  the  filing  responds 



and,  in  general  terms,  the  reasons  the  Service  believes  the  filing  will  advance 

This  witness,  who  would  be  an  officer  having  the  position  and  information 
to  speak  authoritatively  ({>ossibly  even  the  Postmaster  General),  would  not  have 
the  same  function  as  the  witnesses  who  testify  to  aspects  of  the  asserted  facts  of 
the  case.    A  "]x>licy  witness"  at  this  level  would  combine  the  roles  of  a  witness 
presenting  facts  and  a  recognized  policymaker  authoritatively  describing  the 
policies  of  the  organization.    We  see  the  emphasis  as  falling  on  the  latter  function 
—  one  for  which  the  ordinary  trial-type  hearing,  including  discovery  and  cross- 
examination,  is  not  generally  appropriate." 

It  should  therefore  be  p>ossible,  without  losing  the  benefits  of  an 
authoritative  explanation  by  such  a  witness,  to  limit  the  questioning  to  a  level 
suited  to  his  or  her  role.    The  Commission,  while  it  must  make  comprehensive 
findings  of  fact  supporting  its  own  rate  recommendations,  need  not  make  parallel 
findings  concerning  the  precise  contours  of  Postal  Service  tiling  policy  if  these  are 
authoritatively  expounded  by  a  qualified  spokesman.    One  model  for  the 
app>earance  of  such  a  witness  might  be  the  procedure  adopted  in  some  fact-based 
legislative  rulemakings:    participants  may  submit  questions  to  the  officer  presiding, 
who  winnows  them  to  eliminate  irrelevant  or  duplicative  inqmries  and  conducts 
the  actual  questioning.'*   We  believe  there  is  a  significant  difference  between  the 

"   The  Administrative  Procedure  Act  requires  the  Commission  to  allow  "such 
cross-examination  as  may  be  required  for  a  full  and  true  disclosure  of  the  facts." 
5  U.S.C.  §  556(d).    This  general  objective  can  be  served  by  questions  that  either 
(i)  shed  light  on  a  witness's  inconsistencies,  false  or  imjustified  assumptions,  or 
methodological  errors  or  (ii)  clarify  statements  that  once  more  fully  understood  are 
not  challenged  by  the  cross-examiner.    In  the  case  of  a  policy  witness  testifying  at 
a  high  level  of  generality,  it  seems  likely  that  only  the  second  function  woiild 
have  much  imp>ortance. 

'*   A  practical  example  appears  in  International  Harvester  Co.  v.  Ruckelshaus, 
478  F.2d  615,  630-31  (D.C.  Cir.  1973).    Concededly,  this  case  did  not  involve  a 
statute  requiring  a  hearing  "on  the  record."    But  that  requirement,  present  in 
§  3624(a),  does  not  mean  that  issues  on  which  the  Commission  is  not  expected  to 



Commission's  reception  of  evidence  looking  to  dispxKitive  factfinding  on  cost 
attribution  or  the  level  of  worksharing  savings  (v^here  an  APA-type  trial  is 
necessary),  and  the  exposition  of  an  authoritatively-described  policy  background  to 
the  Service's  request  (where  the  Commission  does  little  factfinding  in  the  normal 
sense,  but  where  a  dear  understanding  of  the  policies  is  crucial).    We  believe  the 
Commission  can  express  this  difference,  and  its  procedural  consequences,  in  its 
rules  of  practice. 

The  structure  of  rate  changes.    Because  the  filing  would  comprise  projected 
data  for  the  entire  four-year  cycle  —  rather  than  a  representative  test  year  of  data, 
as  under  present  practice  —  the  rates  in  effect  at  any  given  p)oint  in  the  cycle 
would  be  explicitly  based  on  data  in  the  record  of  the  rate  Ccise."    This  naturally 
raises  the  question:    Should  these  data  be  intertemporally  "averaged"  to  yield  one 
set  of  rates  lasting  the  entire  cycle,  or  should  they  be  made  the  basis  of  specific 
rate  changes  occurring  at  predetermined  points  within  the  cycle? 

A  digression  on  indexing.    Before  discussing  the  question  just  posed, 
however,  it  will  be  convenient  to  address  a  further  option:    indexed  rates.    An 
example  would  be  automatic  annual  rate  adjustments  keyed  to  the  Consumer  Price 
Index  (or  the  CPI  less  a  predetermined  amount,  say  one  percent).    Indexing  does 
not  satisfy  —  in  fact,  it  deliberately  sets  aside  —  the  general  proposition,  stated 
immediately  above,  that  the  rates  at  all  times  would  be  based  on  data  tested  on 

make  adjudicative  findings  must  individually  be  the  subject  of  trial-type  hearings. 

''   Precise  congruence  between  a  year  of  projected  data  and  a  year  of  rates 
cannot  be  expected,  since  there  may  be  good  reasons  for  the  Board  of  Governors 
to  delay  somewhat  the  implementation  of  a  particular  year's  new  rates.    See  page 
32.    But  as  a  general  principle  the  assertion  made  in  the  text  will  hold  true. 



the  rate  case  record.'*   It  is,  however,  a  widely-discussed  ratemaking  option  both 
for  postal  services"  and  for  other  utility  industries. 

The  advantages  claimed  for  indexing  are,  fundamentally,  three:    (i)  once  set 
in  motion,  it  is  simple  and  cheap  to  administer;  (ii)  it  avoids  long  periods  of 
decline  in  real  prices  followed  by  a  large  increase  with  associated  "sticker  shock"; 
and  (iii)  where  profit  is  part  of  the  industry  structure,  it  provides  incentives  for 
technical  efficiency,  in  that  cost  growth  held  below  the  growth  in  the 
predetermined  index  leads  to  increased  dividends.    (Under  a  breakeven  rule  like 
that  of  §  3621,  the  third  argument  has  little  force.) 

Indexing  purchases  simplicity  at  the  expense  of  accuracy  in  cost  tracking. 
The  conflict  has  been  described  thus: 

.  .  .  there  is  no  reason  to  believe  that  the  costs  of  any  sj)ecific 
regulated  firm,  or  postal  authority,  will  increase  in  lock-step  with  the 
overall  rate  of  national  inflation.    If  one  attempts  to  calibrate  the 
adjustment  formula  so  as  to  try  to  ensure  that  changes  in  the  allowed 
prices  will  track  the  regulated  entity's  specific  cost  dia[n]ges,  the 
adjustment  formula  quickly  becomes  very  complex,  and  the  simplicity 
benefit  of  indexed  regulation  disappears.    Also,  in  such  a  situation, 
indexed  regulation  becomes  a  guaranteed  cost-plus  pricing  system, 
and  the  efficiency  incentives  inherent  in  the  fixed  rate  feature  of  the 
public  utility  model  are  lost.'" 

In  some  regulatory  schemes,  the  simplicity  purchased  by  loosening  the  tie 
between  cost  and  price  may  represent  a  net  gain;  more  particularly,  it  may  do  no 

'*  This  is  so  not  because  the  rates  are  not  based  on  current  data  —  they  are 
—  but  because  (i)  the  data  themselves  are  not,  or  are  not  entirely,  cost  data  from 
the  regulated  enterprise,  and  (ii)  they  are  not  evaluated  on  a  hearing  record. 

"    IPA,  The  Ratemaking  Process  at  9-10;  PRC  Docket  No.  RM91-1,  Conunents  of 
McGraw-Hill,  Inc.,  at  6;  Advertising  Mail  Marketing  Association  at  9ff. 

"    George  R  Hall,  Regulatory  Systems  for  Postal  Rates,  Paper  presented  at  the 
Conference  on  Postal  Economics  and  Policy,  La  Londe  les  Maures  (March  1992)  at 



violence  to  the  regulatory  statute  and  the  policies  behind  it."    It  is  far  from  dear 
that  such  a  tradeoff  would  satisfy  the  language,  or  the  underlying  policy,  of  the 
Postal  Reorganization  Act.    Both  the  breakeven  requirement  of  §  3621  and  the 
attributable-cost  recovery  mandate  of  §  36  2(b)(3)  could  be  violated  if  the  Postal 
Service's  experienced  costs  diverged  too  far  from  the  "expected"  revenues  from 
rates  generated  by  an  extrinsic  index. 

Separating  rate  changes  from  rate  cases.    If,  putting  aside  the  option  of  rate 
indexing,  we  focus  on  cost-based  systenis  incorporating  cost  estimates  for  a  full 
prospective  rate  cycle  in  place  of  the  supposedly  representative  test  year,  the  next 
question  is  the  proper  relationship  between  the  rate  case  where  these  data  are 
tested  and  interpreted  and  the  actual  changes  in  rates  which  they  imply. 

At  page  15  we  outlined  the  reasons  for  effectuating  the  total  revenue  change 
implied  by  a  rate  cycle's  worth  of  estimates  in  smaller  but  more  frequent  steps 
than  is  now  the  practice.    In  line  with  that  view,  we  concluded  that  there  were 
very  persuasive  reasons  for  spreading  the  total  change  over  a  number  of  steps. 

This  logic,  however,  does  not  fully  determine  how  the  rate  cycle  should  be 
administered.  A  threshold  question  is  whether  there  should  be  an  opportunity  to 
adjust  the  anticipated  profile  of  rate  changes  partway  through  the  cycle. 

The  "maximum  simplicity"  model  would  call  for  the  adoption,  at  the  outset, 
of  a  set  of  predetermined  rate  changes  not  thereafter  subject  to  alteration.    This 
would  effectively  reduce  the  administration  and  litigation  burden  to  a  single 
omnibus  case  every  four  years.    The  series  of  changes  would,  of  course,  reflect  the 

"    There  may  be  a  historical  analogy  in  the  decision  of  the  Federal  Power 
Commission  to  abandon  individual  company  cost  of  service  regulation  and  set 
natural  gas  field  prices  on  an  areawide  basis.    This  initiative  was  upheld  in 
Permian  Basin  Area  Rate  Cases,  390  U.S.  747,  768  ff.,  775-77  (1968)  —  parUy  on  the 
basis  that  the  Natural  Gas  Act  lays  down  highly  generalized  ratemaking 



pattern  of  expected  cost-inaurence  changes  and  other  relevant  factors  over  the 
entire  cycle.    Simply  adding  up  the  separate  annual  revenue  increases,  dividing  the 
cycle  total  into  four  approximately  equ<d  parts,  and  designing  rates  to  recover  each 
annual  revenue  requirement  would  waste  much  of  the  information  assembled  for 
the  omnibus  case,  needlessly  sacrificing  our  opportunity  to  improve  cost  tracking. 

Even  as  just  qualified,  however,  this  "one-step"  model  imposes  penalties  in 
terms  of  accuracy  and  management  flexibility  which  the  Task  Force  expects  would 
be  unacceptable  to  the  Postal  Service,  to  mail  users  and  other  rate  case 
participants,  and  to  the  Commission. 

The  accuracy  problem  stents  from  the  conrunon-sense  perception  that 
predicting  the  future  revenue  needs  of  an  enterprise  as  large  and  complex  as  the 
Postal  Service  is  difficult  enough  a  year  or  two  in  the  futiire,  even  with  the 
discipline  imposed  by  a  trial-type  hearing  process.    To  expect  either  the  Service's 
in-house  forecasters,  in  the  first  instance,  or  the  Commission,  aided  by  the  criticism 
and  additional  information  brought  to  light  on  a  hearing  record,  to  produce 
consistent  breakeven  or  near  breakeven  results  as  much  as  four  years  in  advance 
seems  unduly  optinustic.    The  one-step  model,  however,  makes  it  axiomatic  diat 
such  forecasts,  as  embodied  in  the  initial  rate  change  plan,  must  be  substantially 
on  target. 

If  they  are  not,  however,  the  one-step  model  provides  no  mechanism  for 
upward  correction  other  than  the  present  prior-year-loss  recovery  mechanism",  and 
no  explicit  mechanism  at  all  for  downward  correction.    Having  to  resort  to 
unplanned  PYL  recovery  on  any  l^rge  scale  would  be  a  disappointing  outcome  to 
the  process,  given  that  a  rate-cycle  plan  normally  should  include  a  targeted  level 
of  reduction  in  the  Service's  accumulated  deficits.    The  Task  Force,  therefore. 

°    Many  of  the  complaints  about  the  PYL  mechanism  expressed  in  the  most 
recent  rate  case,  and  reflected  in  the  joint  concurrence  signed  by  all  five 
Commissioners,  would  be  alleviated  by  the  adoption  of  a  knotvn  rate  cyde. 



favors  steps  that  would  prevent  as  far  as  possible  the  incurrence  of  additional 
cumulative  losses  during  the  rate  cycle  itself. 

The  flexibility  problem  is  not  unrelated.    Under  present  law,  it  is  the  Service 
that  initiates  the  rate  process,  when  it  "determines  that  such  cha:  jes  would  be  in 
the  public  interest."    39  U.S.C.  §  3622(a).    Some  relinquishment  of  that  flexibility  in 
timing  is  implicit  in  the  Service's  committing  itself  to  a  four-year  cycle  and  to  a 
set  of  explicit  cost,  volume,  and  revenue  predictions  covering  the  whole  four  years. 
If  it  is  to  make  that  commitment,  it  presumably  must  be  confident  that  the 
ratemaking  mechanism  will  not,  even  on  those  terms,  force  it  to  miss  its  statutory 
breakeven  target. 

Thus  the  one-step  model  shares  one  of  the  main  faults  of  indexing  —  the 
likelihood  of  departing  substantially  from  the  actual  pattern  of  cost  incurrence  — 
without  providing  whatever  benefits  to  technical  efficiency  might  be  thought  to 
derive  from  an  extrinsic  cost  index. 

The  two-step  model.    The  Task  Force  accordingly  recommends  a  system  in 
which  rates  (i.e.,  rate  changes)  for  the  whole  cycle  are  laid  out  in  advance,  but  — 

1.  The  Commission  formally  recommends  —  in  the  §  3624  sense  —  only  the 
first  two  years'  rates;  and 

2.  In  the  middle  of  the  cycle  there  is  an  abbreviated  case,  essentially  limited  to 
breakeven-oriented  adjustments,  which  results  in  the  Commission  either 
validating  or  changing  the  projected  rates  for  the  second  two  years  of  the 
cycle,  and  recommending  them  under  §  3624. 

In  our  opinion,  this  mechanism  best  combines  (i)  procedural  streamlining 
and  reduction  of  litigation,  (ii)  opportunity  for  public  participation  in  ratemaking, 
(iii)  recognition  and  use  of  Postal  Service  planning  efforts  in  pricing  postal 
services,  and  (iv)  assurance  of  breakeven  as  required  by  the  Act. 



The  midcyde  case.    It  will  be  important  to  insure  that  the  midcyde  case 
avoids  two  pitfalls: 

1.  It  cannot  be  allowed  to  grow  into  an  additional  omnibus  rate  case  where  all 
or  most  of  the  issues  thrashed  out  in  the  basic  case  are  reopened;  and 

2.  It  cannot  be  simplified  so  drastically  that  it  fails,  in  practice,  to  enable  the 
Service  to  complete  the  four-year  cyde  in  as  nearly  as  possible  the  position 
aimed  at  when  the  cyde  began. 

Given  that  there  will  have  been  a  full  opportimity  to  litigate  them  in  the 
cyde-initiating  omnibus  case,  a  number  of  issues  can  be  generically  exduded,  by 
Conunission  rule,  from  the  midcyde  proceeding.    Since  the  fundamental  purpose 
of  the  midcyde  case  is  to  help  achieve  the  goals  of  the  entire  cyde,  there  would 
be  no  need  to  revisit  — 

1.  Pricing  questions  (i.e.,  the  relative  contribution  to  institutional  costs  of  the 
various  dasses  and  services); 

2.  Attribution  methods; 

3.  Volume  estimation  methods; 

4.  Rate  design;  or 

5.  Qassification  issues. 



It  seems  equally  clear  that  actually-experienced  volumes,  cost  levels,  and 
billing  determinants"  must  be  used  in  the  midcycle  case  to  arrive  at  improved 
forecasts  for  the  last  two  years  of  the  cycle.    It  is  these  parameters  that  detemnine 
the  breakeven  target  and  thus  govern  the  calculation  of  new  rates  for  those  years. 
Naturally,  it  is  to  be  hoped  that  the  projected  rates  for  the  later  years  will  turn 
out  to  have  been  close  to  those  indicated  by  forecasts  derived  from  the  later  actual 
data:    one  benefit  to  users  from  the  four-year  cycle  is  predictability  of  increases. 
But  the  point  of  the  two-step  cycle  is  that  most  issues  other  than  financial 
breakeven  will  be  tried  and  decided  once,  and  that  the  midcycle  case  is 
fundamentally  a  response  to  the  inherent  uncertainty  of  predictions. 

Such  linuting  of  midcycle  case  issues,  in  turn,  would  reduce  drastically  the 
time  needed  to  try  the  c<ise.    For  example,  in  the  most  recent  omnibus  proceeding 
the  Postal  Service's  direct  evidentiary  case  (the  prepared  testimony  filed  along  with 
the  request)  comprised  the  statements  of  23  witnesses.    Their  subject  areas,  by 
general  category,  broke  down  as: 

"    In  a  class  with  various  options  that  affect  the  postage  paid,  the  relative 
prevalence  of  different  presort  levels,  destination-entry  levels,  and  the  like  will 
help  determine  total  class  revenue.    Thus,  for  example,  in  a  pound-rated  category 
an  unforeseen  change  downward  in  the  weights  of  pieces  mailed  would  reduce 
revenue  below  predicted  levels  even  if  the  volume  projections  were  absolutely 




Revenue  Issues  (Financial) 


Volume  Forecasting 
Base  Year  Costs 


Rollforward  of  Costs  to  Test  Year 


Cost  Attribution  Issues 


Pricing  Issues 

Rate  Design/Classification  Changes 

Data  Systems 

Worksharing  Discounts 

Market  Research 



TOTAL  23 

In  a  nudcyde  case,  limited  as  described  above,  we  would  exp>ect  testimony 
on  actual  volume  experience  (as  distinct  from  forecasting  methodology);  actual  cost 
experience  and  cost  fn-ojections  for  the  out  years;  and  associated  financial 
questions.    Rate  design  issues  of  the  more  ministerial  sort  (e.g.,  questions  of 
rounding)  might  occur  as  well,  but  should  not  approach  the  complexity  —  or 
contentiousness  —  of  rate  design  issues  now  present  in  an  omnibus  case.    Because 
the  profile  of  rates  and  the  classifications  to  which  they  apply  would  not  be  open 
for  changes,  the  Service  would  not  be  supporting,  nor  other  piuties  opposing  or 
offering  alternatives  to,  new  discount  or  rate  categories. 

Consequently,  even  if  we  do  no  more  than  excise  the  no-longer-relevant 
lines  from  the  table  above,  we  see  the  Service's  case  perhaps  reduced  to  four 
witnesses.    In  fact,  it  is  quite  likely  that,  since  the  individual  issues  should  be 
simpler,  presentations  could  be  combined.    In  a  suitably  uncomplicated  case  even 
two  or  three  witnesses  might  be  able  to  do  the  whole  job.'* 

"   There  is,  concededly,  one  new  feature  not  present  in  the  present  scheme. 
Since  the  midcyde  case  will  be  in  leu'ge  measure  a  comparison  with  previous 
predictions,  it  will  probably  be  useful  for  the  Postal  Service  to  demonstrate  the 
reasons  for  any  substantied  departures.    Without  such  a  showing,  a  great  part  of 
the  gain  in  accountability  which  the  rate  cyde  mechanism  promises  would  be  lost; 
the  midcyde  case  would  then  tend  to  become  a  mechanical  "flow-through"  device 



Spacing  of  increases  and  choice  of  implementation  dates.    One  question  to 
which  the  Task  Force  gave  considerable  attention  is  the  spacing  of  increases  for 
the  different  classes  and  special  services.    The  four-year,  two-step  model  does  not 
necessarily  require  changes  in  all  rates  every  year.    It  does,  however,  require  that 
the  pattern  of  changes  writhin  the  cycle  be  known  at  the  beginning  —  i.e.,  in  the 
omnibus  case  —  and  adhered  to  throughout  the  cycle. 

Under  the  Act,  the  Postal  Service  has  the  responsibility  for  deciding  when  to 
file  a  request  for  rate  changes.    39  U.S.C.  §  3622(a).    At  present,  this  responsibility 
can  be  exercised  in  two  ways:    by  determining  to  file  an  omnibus  rate  case;  or  by 
determining  to  file  for  a  localized  change  in  a  rate,  or  (most  commonly)  for  a 
classification  change  that  creates  a  new  rate  or  discount.    In  recommending  the 
four-year  rate-cycle  model,  however,  the  Task  Force  has  had  to  face  the  question 
whether  it  is  the  Service,  under  §  3622(a),  or  the  Commission,  under  the 
ratemaking  provisions  of  chapter  36,  that  should  decide  the  dass-by-dass  spacing 
of  increases  within  the  cycle.    By  "sparing"  we  mean  the  pattern  presented  and 
recommended  in  the  cycle-initiating  omnibus  case  whereby  some  dasses  might  be 
scheduled  for  increases  annually,  some  biennially,  and  others,  perhaps,  only  once 
during  the  cycle.    The  Task  Force  believes  the  four-year  rate  cyde  will  be  more 
successful  if  the  designation  of  these  timetables  is  left  to  the  Postal  Service  — 
subject,  of  course,  to  the  basic  ratemaking  commands  that  control  both  the  Service 
and  the  Commission." 

Two  of  the  purposes  of  the  reform  are  to  improve  the  Service's  breakeven 
performance  and  to  simplify  and  make  more  predictable  the  process  of  changing 

if  costs  increased  more  than  predicted. 

^   Thus  the  Service,  as  well  as  the  PRC,  must  refrain  from  undue  or 
unreasonable  discrimination  or  preferences  [§  403(c)],  and  the  Governors  must 
establish  "reasonable  and  equitable  rates  of  postage  and  fees  for  postal  services" 
[§  3621]. 



rates.    Under  existing  law  the  Board  of  Governors  has  the  ultimate  responsibility 
for  insuring  breakeven,  and  thus  for  overall  financial  and  business  management  of 
the  Service.    It  seems  to  us  ,  for  example,  that  the  Service  could  propose  to 
change  most  First-,  second,*  and  third-class  rates  a  second  time  during  the  cycle, 
following  the  midcyde  case;  to  change  [>arcel  and  other  competitive  rates  annually 
so  as  to  align  them  more  currently  with  costs;  and  perhaps  to  change  some  minor 
categories  (induding  many  spedal  services)  only  once  in  the  cyde.**   We  would 
emphasize  that  these  timing  categories  must  be  broad  ones,  so  as  not  to  raise 
questions  under  the  more  spedfic  ratemaking  mandates  of  the  Act.    The  timing  of 
changes  should  be  such  as  to  avoid  discrimination  and  anticompetitive  pridng 
issues  and  should  be  regular  so  that  the  predictability  benefits  of  the  system  are 

The  Task  Force  therefore  recommends  that  Commission  rules  on  the  four- 
year  cycle  make  it  dear  that  the  Service's  choice  of  a  timetable  for  changing  broad 
categories  of  rates,  expressed  in  the  omnibus  filing  and  maintained  thereafter 
during  the  cyde,  would  normally  be  controlling. 

As  a  corollary,  we  also  recommend  px>sitive  steps  to  insure  that  the 
timetable  is  adhered  to  throughout  the  cyde.    Under  existing  law,  the  Board  of 
Governors  determines  the  implementation  date  of  any  change  in  rates.    39  U.S.C. 
§  3625(0.    Our  proposal  calls  for  the  FRC  to  make  a  second-year^  recommendation 
in  the  format  "Not  earlier  than  [date]  .  .  .  .  "  (the  date  being  one  year  after  the 
first  change  in  that  part  of  the  cycle).    By  accepting  the  recommended  decision, 
the  Governors  would  be  undertaking  to  make  the  recommended  increases  effective 

**   While  employed  here  as  an  example,  this  profile  of  changes  was  discussed 
favorably  in  the  Task  Force's  deliberations.    Rates  after  the  fourth  year  would 
depend  on  the  decision  in  the  next  omnibus  rate  case. 

"  That  is:    in  the  omnibus  case,  the  second  year  of  the  cyde;  in  the  midcyde 
case,  ti>e  fourth  year. 



no  earlier  than  the  date  given.    This  would  assure  mailers  that  additional  revenue 
would  not  be  collected  earlier  than  the  rate  case  presentations  had  assumed. 

A  somewhat  different  problem  arises  from  the  possibility  that 
implementation  of  the  second  set  of  changes  might  be  unduly  delayed.    The  Task 
Force  is  not  reconunending  what  nught  appear  the  simplest  solution:    a  single  date 
certain,  expressed  in  the  recommended  decision,  for  the  rate  change.    We 
recognize  that  transient  conditions,  imforeseeable  at  the  time  the  recommended 
decision  is  issued,  make  it  appropriate  to  leave  some,  even  though  not  unlimited, 
flexibility  for  the  exercise  of  §  3625(0  discretion  at  the  time  the  second  set  of 
changes  is  to  be  implemented. 

On  the  other  hand,  it  would  clearly  be  inconsistent  with  the  theory  and 
purpose  of  the  four-year  rate  cycle  to  delay  implementation  excessively,  or  on  a 
selective  basis.    Delaying  implementation  for  more  than  a  limited  time  would 
produce  an  imbalance  between  costs  and  revenues  that  would  frustrate  a  major 
goal  of  the  rate-cycle  proposal."    In  addition,  of  course,  the  Commission's 
recommended  decision,  in  calculating  the  rates  that  will  produce  the  required 
breakeven  result,  necessarily  assumes  at  least  an  approximate  implementation 
date."    The  necessary  reconciliation  between  the  Board's  power  to  choose  the  date 
and  the  requirement  that  the  Commission  produce  a  breakeven  result  can  be 
brought  about  by  the  Board's  exercising  its  disaetion  in  advance,  and  making  the 
expected  implementation  date  a  factor  in  the  rate  filing. 

"    We  pointed  out  above  (page  17)  that  one  of  the  advantages  of  the  explicit 
rate  cycle  is  the  opportunity  it  provides  for  actual  retirement  of  accumulated 
deficits  and  restriction  of  the  contingency  provision  to  its  expressed  statutory 

"    In  Docket  No.  R90-1,  the  Postal  Service  helped  simplify  this  question  by 
making  such  a  date  explicit  in  its  own  calculations  and  suggesting  that  it  be  used 
as  the  reference  point  in  the  Commission's. 



The  Task  Force  views  this  aspect  of  the  rate-cyde  procedure  as  an 
appropriate  one  for  conunitment  by  the  Board  of  Governors  as  well  as  the  PRC  to 
the  exercise  of  their  respective  powers  in  consonance  with  the  plan.    If  the  Board 
and  the  Commission  agree  that  the  four-year  rate  cycle  is  a  desirable 
improvement,  it  follows  from  the  fact  of  shared  responsibility  that  their 
implementing  rules  and  policies  must  be  consistent  and  complementary.    A  proper 
balance  must  be  achieved  between  implementation-date  flexibility  sufficient  to 
accommodate  circumstances  not  factored  into  the  rate  decision,  and  the 
preservation  of  the  accountability  and  predictability  gains  the  four-year  cycle  is 
designed  to  produce. 

Rounding  the  First-Qass  letter  rate.    One  practical  problem  of 
implementation  which  the  Task  Force  examined  is  that  of  the  integer  First-Class 
letter  rate.    The  Commission  and  the  Service  have  consistently  assumed  that  this 
rate,  to  be  administrable,  must  be  expressed  in  whole  cents. 

At  current  (1992)  volume  levels,  one  cent  on  the  First-Oass  letter  rate 
equates  to  approximately  $800  million.    Rounding  up  or  down  to  a  whole  cent, 
therefore,  involves  a  maximum  of  some  $400  million  (about  0.8  percent  of  the  total 
revenue  requirement).    The  average  rounding  amount  over  a  number  of  cases 
would  approximate  $200  million. 

The  Task  Force  recommends,  so  far  as  the  rates  formally  recommended  for 
the  first  two  years  of  the  cycle  are  concerned,  that  the  Commission  round  up  or 
down  as  the  numbers  require,  just  as  it  does  today.    The  Ccmunission,  of  course, 
will  not  initially  be  recommending  rates  for  the  third  and  fourth  years  of  the 
cycle,  but  ovly  furnishing  a  forecast  of  what,  on  current  data,  those  rates  would 
probably  be.    The  forecast  of  the  First-Class  letter  rate  should  not  be  expressed  as 
a  whcAe  cent;  its  function  is  to  give  users  a  general  notion  of  what  rates  they  can 
expect  to  pay  in  future  years,  and  to  serve  as  the  base  for  scaling  rates  to  matdi 
the  revenue  requirement  finalized  in  the  midcyde  case. 



A  more  difficult  problem  arises  in  the  midcyde  case,  where  the  rate  pattern 
determined  in  the  onrmibus  case  is  to  be  scaled  to  the  then  currently  projected 
revenue  requirement.    Only  by  chance  will  this  scaling  exercise  imply  an  integer 
First-Cleiss  rate,  an:  the  nature  of  the  case  is  such  as  to  exclude  accommodation  of 
the  needed  rounding  by  adjustments  elsewhere  in  the  rate  schedule.    In  this 
situation,  we  believe  the  best  solution  is,  again,  to  round  up  or  down  as  the 
underlying  numbers  dictate.    The  resulting  slight  imprecision  in  the  balance 
between  revenue  and  costs  over  the  rate  cycle  should  be  considered  as  within  the 
practical  tolerances  of  the  process,  given  the  value  to  the  public  of  the  integer 

Implementing  the  foiir-yeai  rate  cycle  system.    We  pointed  out  above 
(page  11)  that  the  four-year  rate  cycle  can  be  implemented  without  legislation. 
The  Commission  has  broad  authority  to  make  rules  "necessary  and  proper  to  carry 
out  [its]  functions  and  obligations"  (39  U.S.C.  §  3603),  and  the  substantive 
provisions  of  chapter  36  do  not  prescribe  specific  methods  of  conducting  rate  cases 
(apart  from  the  hearing  requirements  of  §  3624).    Similarly,  the  Board  of 
Governors,  in  the  exercise  of  its  responsibility  to  authorize  the  filing  of  requests 
and  to  place  rates  in  effect,  can  adopt  the  necessary  procedures  by  rule  or  other 
appropriate  mode  of  official  action. 

The  problem  of  implementation  is  thus  a  question  not  of  jurisdiction  or 
authority  but  of  time  pressure.    The  last  omnibus  rate  case  was  filed  with  the  PRC 
in  March  1990;  and,  while  there  were  complex  remand  proceedings  during  most  of 
1991,  the  actual  collection  of  inaeased  revenues  began  in  January  of  that  year.    On 
the  analogy  of  past  rate  cycles,  it  is  reasonable  to  assume  for  planning  purposes 
that  another  omnibus  case  may  be  filed  in  the  early  months  of  1993.    If  that  case 
is  to  follow  the  four-year  rate  cycle  pattern  —  and  the  Task  Force  strongly 
believes  it  should  —  the  PRC  and  the  Board  must  make  the  necessary  decisions 



and  oommitments  and  enact  the  appropriate  regulations,  as  quickly  as  proper 
public  participation  and  adequate  analysis  of  the  issues  will  permit." 

The  Postal  Service's  ex\.  :;rience  with  preparation  of  rate  cases  indicates  that, 
for  filing  in  the  early  months  of  a  calendar  year,  the  rules  the  filing  must  follow 
should  be  known  and  certain  by  the  previous  September.    Ideally,  therefore,  the 
PRC  would  need  to  issue  final  rules  by  mid-August  1992.    (Timing  questicxis  are 
discussed  in  Chapter  Vm.)    This  is  a  demanding  schedule,  but  it  seems  feasible  in 
light  of  two  facts:    (i)  many  of  those  likely  to  be  interested  are  familiar  with  the 
general  question  from  debate  over  it  elsewhere,  and  (ii)  the  Commission  already 
has  pending  a  general  procedural  reform  docket  (RM91-1)  which  has  elicited 
comments  expressing  some  parties'  views  on  it,  and  which  can  easily 
accommodate  the  four-year  rate  cycle  rules.   Thus  neither  the  Commission's 
startup  time  nor  the  parties'  need  for  time  to  formulate  comments  is  likely  to 
make  the  above  timetable  unrealistic. 

Conclusion.    The  Task  Force  recommends,  as  a  basic  reform  of  the  current 
omnibus  rate  case  process,  the  joint  adoption  of  the  explicit  four-year  cyde  with  a 
stringently  limited  midcyde  proceeding  focused  on  assessing  that  the  cyde's 
breakeven  target  is  met.    This  new  model  would: 

1.  Benefit  mail  users  by  increasing  the  predictability  of  rate  dianges  and 
moderating  their  size; 

2.  Improve  the  accountability  of  the  system  by  substituting  a  known  cyde  of 
rate  filings  for  the  present  indeterminate  cyde; 

*"   This  is  true  also  of  the  spedal  rate  structure  provisions  needed,  under  the 
proposal  discussed  at  40,  for  certain  competitive  categories  of  mail.    The  Postal 
Service  will  presimiablv  wish  to  suggest  rate  levels  for  them  in  its  filing,  and 
therefore  wiu  need  to  know  that  rates  designed  in  the  way  contemplated  by  the 
Task  Force  proposal  will  be  permissible. 



3.  Improve  the  efficacy,  and  p>ermit  a  decrease  in  the  size,  of  the  contingency 
provision,  as  well  as  facilitating  orderly  recovery  of  accumulated  past  losses; 

4.  Reduce  transaction  costs  by  increasing  the  interval  between  full-scale  cases 
to  four  years;  and 

5.  Introduce  and  use  a  cost-tracking  model  using  a  set  of  explicit  projections 
for  the  full  rate  cycle  —  a  system  much  better  adapted  to  sound  ratemaking 
in  an  environment  of  rapid,  widespread,  and  diverse  change. 

C.       Ancillary  Procedures 

Our  recommendation  for  a  two-step,  four-year  rate  cycle  would  put  pressure 
on  both  the  omnibus  case  and  the  midcyde  case.    The  midcyde  case  would 
require  tight  control  of  the  issues  open  for  litigation.    If  the  limits  were  to  break 
dowTi,  even  under  the  force  of  changing  circumstances,  the  process  might  lose  its 
acceptability.    The  Task  Force  does  not  think  that  the  parties  would  tolerate 
increasing  the  inddence  of  full-scale  litigation  over  rates  from  roughly  every  three 
years,  as  at  present,  to  every  two  years.    In  the  omnibus  cases,  the  strategic  focus 
added  by  our  recommendation,  with  no  relaxation  of  the  10-month  time  limit, 
could  place  additional  strain  on  an  already  crowded  litigation  schedule. 

The  Task  Force  recommends  two  measures  to  deal  with  some  of  these 
pressures.    These  involve  limited  scof)e  rate  cases  and  the  careful  use  of 
rulemaking  procedures  to  settle  some  repetitive  costing  issues. 

Limited  scope  rate  cases.    In  the  two-step  rate  process  we  have 
recommended,  the  first  rate  case  fixes  the  pattern  of  interdass  rate  relationships 
throughout  the  cyde.    We  think  that  p>ostal  customers  will  benefit  from  more 
predictability  and  regularity  in  ratemaking.    But  four  years  is  a  long  time  in 
today's  economy. 



Many  kinds  of  changes  could  conceivably  undermine  the  pattern  set  in  the 
omnibus  case.    For  example,  a  year  or  more  of  experience  with  a  new  mail 
preparation  discount  might  reveal  it  to  be  much  more  or  less  attractive  than 
expected.    Operational  developments  might  dramatically  change  cost  pattenu. 
Market  shifts  might  drastically  alter  the  balance  between  service  alternatives.    A 
responsive  rate  process  needs  to  be  flexible  enough  to  adapt. 

If  diange  severely  imdennines  the  revenue  and  cost  balance  assvmied  in  the 
pattern  for  the  four-year  cycle,  then  the  Postal  Service  conceivably  might  have  to 
file  early  to  start  the  process  over,  before  the  full  cycle  is  complete.    For  the  two- 
step  process  to  work  as  we  have  designed  it,  resort  to  early  filings  should  be  rare. 

If  change  during  the  four-year  cycle  suggests  the  need  to  alter  oiUy  limited 
pieces  of  the  underlying  pattern,  a  process  should  be  available  to  consider  making 
an  adjustment.    The  Task  Force  recommends  that  rules  be  established  for 
processing  separate  and  narrowly  tailored  rate  cases,  filed  during  a  four-year  rate 
cycle  (but  outside  the  midcyde  case),  for  the  purpose  of  adjusting  the  pattern  set 
in  the  omnibus  case  without  reopening  other  issues.    The  Commission  should 
administer  this  process  so  as  not  to  get  bogged  down  by  the  injection  of 
independent  or  only  marginally  related  matters. 

Rulemaking  for  repetitive  costing  issues.    Some  of  the  issues  occupying 
considerable  attention  and  resources  in  rate  cases  have  tended  to  come  up  again 
and  again,  from  case  to  case,  in  one  form  or  another.    Notice-and-comment 
rulemaking  has  been  suggested  as  a  ix>ssible  means  of  taking  such  issues  outside 
the  ratemaking  procedure  itself. 

In  considering  this  matter,  the  Task  Force  was  seitsitive  to  the  need  to 
protect  the  right  of  interested  parties  to  a  hearing  on  changes  in  rates  as 
prescribed  by  law.    We  do  not  prop>ose  the  use  of  rulemaking  for  breaking  new 
ground  on  costing  matters. 



Our  recommendation  is  that  the  Commission  consider  promulgating  costing 
principles  on  a  particular  issue  by  rule  when  the  issue  has  been  well  ventilated  in 
hearings  over  several  cases  but  the  rate  procedure  seems  unable  to  put  it  to  rest. 
We  suggest  starting  with  a  conference  to  deirify  what  is  at  stake  and  assess 
whether  further  hearings  would  improve  understanding  on  it  or  not.    Unless  the 
conference  reveals  legitimate  areas  for  further  development  in  future  cases,  the 
Commission  would  then  proceed  to  issue  a  proposed  rule  for  connment.  If 
adopted,  the  rule  would  settle  the  issue  for  future  cases  vmtil  someone  could  bring 
sufficient  new  light  to  bear  on  the  subject  to  make  waiver  or  modification  of  the 
rule  appropriate. 





The  Task  Force  considered  the  role  of  the  Postal  Service  as  a  governmental 
entity  competing  with  firms  in  the  private  sector.    We  concluded  that  its  universal 
service  obligation,  its  monopoly  in  letter  mail,  and  the  need  to  use  postal  resources 
in  the  most  productive  manner  makes  it  appropriate  for  the  Postal  Service  to 
provide  some  products  also  offered  by  the  private  sector: 

•  the  Postal  Service's  letter  mail  monopoly  gives  rise  to  large  economies 
of  scale  and  scope  which  may  give  it  a  comparative  advantage  in 
some  sectors  of  the  marketplace.    The  economy  should  be  allowed  the 
benefits  of  any  such  comparative  advantages. 

•  because  of  its  structural  differences  from  competitors,  the  Postal 
Service  is  in  a  better  position  to  service  some  segments  of  the  market. 

•  competition  helps  the  Postal  Service  and  its  customers  gauge  the 
quality  of  its  service  and  its  comparative  cost  structure. 

•  competitive  products  make  a  welcome  contribution  to  the  fixed 
institutional  costs  of  the  Postal  Service,  offsetting  a  part  of  the 
contribution  which  would  otherwise  have  to  be  made  by  the  non- 
competitive products. 

The  Task  Force  believes  that  modification  can  be  made  in  the  ratemaking 
process  to  allow  the  Postal  Service  to  compete  more  efficiently  in  markets  where 
its  products  are  subject  to  direct  competition. 



A.  Determining  which  Postal  Products  are  Competitive 

While  the  Private  Express  Statutes  provide  broad  protection  for  most  of  the 
revenue  of  the  Postal  Service,  there  are  some  postal  products  which  are  dearly 
subject  to  direct,  in-kind  competition.    The  Task  Force  takes  the  concept  of  direct 
competition  to  indude  products  offered  by  private  firms  substantially  similar  to 
Postal  Service  offerings.    Some  postal  products  technically  covered  by  the 
monofxriy,  furthermore,  may  have  substitutes  which  are  arguably  in  direct 
competition  with  them. 

The  markets  in  which  the  Postal  Service  provides  services  are  changing  and 
so  the  determination  of  which  postal  products  are  competitive  must  also  be 
continually  reviewed.    The  Task  Force  recommends  that  the  Postal  Rate 
Commission  use  its  rulemaking  authority  to  establish  criteria  for  determining 
competitive  postal  products  and  at  the  same  time  designate  those  current  postal 
products  it  deems  to  be  competitive.    From  time  to  time,  the  Commission  should 
revisit  the  subject  as  changes  develop  in  the  market  for  postal  products.    The  Task 
Force  believes  that  Express  Mail,  parcel  post  and  heavy  weight  Priority  Mail  are 
currently  subject  to  significant  direct  comp)etition.    But  we  have  not  made  an 
exhaustive  investigation  to  determine  which  products  are  competitive.    That  is  a 
task  for  the  Conunission  (as  part  of  its  rulemaking)  with  the  active  partidpation  of 
the  Postal  Service  and  the  interested  parties.    The  following  discussion  is  limited 
to  providing  flexible  rates  for  Express  Mail,  parcel  post  and  heavy  weight  Priority 

B.  Price  Flexibility  for  Competitive  Classes 

The  institutional  cost  contribution  prescribed  by  the  Commission  for  a 
competitive  subdass  may  in  practice  be  difficult  to  achieve  because  of  changing 
market  conditions.    A  given  rate  for  a  competitive  produd  could  in  effed  become 



obsolete  if,  for  example,  the  general  price  level  in  a  competitive  market  drops 
substantially.    Using  this  example,  a  resp>onsive  ratemaking  mechanism  for 
competitive  products  should  allow  the  rate  to  fall  or  to  be  increased  so  that  a 
chosen  aggregate  institutional  cost  contribution  may  be  maintained. 

It  is  important  to  note  that  there  may  be  a  difference  between  a  selected 
institutional  cost  contribution  (based,  as  such  choices  must  be,  on  record  evidence) 
and  what  subsequently  turns  out  to  be  achievable  under  changing  market 
circumstances.    In  some  drojmstances,  the  best  that  can  be  accomplished  may  be 
to  change  rates  so  as  to  nunimize  the  loss  in  aggregate  institutional  contribution. 
The  Task  Force  therefore  concludes  that  flexibility  is  an  essential  characteristic  for 
setting  rates  for  competitive  products. 

The  Service's  competitive  products  are  handicapped  by  the  current 
ratesetting  procedures  which  were  established  when  markets  for  these  products 
changed  much  more  slowly  or,  in  some  cases,  were  less  developed  or  important 
than  they  now  are.    The  Commission's  recommendations  in  an  omnibus  rate  case 
are  frequently  based  on  record  data  which  may  be  up  to  a  year  and  a  half  out  of 
date.    Even  the  expedited  procedure  now  in  effect  for  Express  Mail  allows  three 
months  for  the  Commission  to  act.    In  addition,  the  Service  must  spend  at  least 
two  months  preparing  its  filing  with  the  Commission  and  about  a  month  to 
respond  to  the  Contmission's  recommended  decision.    In  six  months'  time,  the 
market  may  well  have  changed  substantially,  rendering  even  the  new  rate  obsolete. 

The  Task  Force  recommends  that  in  order  to  introduce  more  flexibility 
into  setting  rates  for  competitive  products,  the  Commission  adopt  a  ''rate  band" 
approach.    We  start  with  the  statutory  constraint  against  cross-subsidy  and  imdue 
discrimination.    We  recognize  that  at  any  given  time  a  range  of  markups  for  a 
competitive  product  would  be  consistent  with  the  several  factors  prescribed  in 
§  3622.    Further,  in  order  for  the  Postal  Service  to  meet  its  breakeven  mandate, 
markups  must  be  established  for  all  the  subclasses  which  collectively  will  recover 
all  the  institutional  costs  of  the  Service.    The  exact  markup  selected  for  each 



subdass  must  fall  widiin  the  range,  and  yield  an  aggregate  revenue,  when 
combined  witii  the  revenue  from  the  other  classes,  to  allow  the  Service  to  break 

Thus,  for  each  competitive  category,  the  Commission  would  set  an  upper 
and  lower  markup  and  an  aggregate  institutional  cost  contribution.    The 
contributicm  from  each  competitive  category  would  be  used  in  the  Commission's 
breakeven  analysis.    The  rates  recommended  by  the  Commission  would  establish 
upper  and  lower  bands  for  each  rate  element  within  the  category's  rate  structure. 
The  lower  rate  band  would  protect  against  the  possibility  of  aoss-subsidy  and 
insure  a  minimiun  acceptable  markup.    The  upper  band  would  prevent  the  Service 
from  exploiting  rdatively  captive  customers. 

The  Service  would  select  sf)edfic  prices  within  the  bands,  giving  proper 
notice  to  its  customers.    It  would  be  free  to  make  changes  as  often  as  it  felt 
market  circumstance  required.    In  making  these  adjustments,  the  Service  would  be 
free  to  select  whatever  price  it  deemed  appropriate  for  each  rate  element  so  long 
as  the  price  selected  fell  within  the  band  for  that  rate  element."    In  so  doing,  the 
Service  would,  to  the  extent  feasible,  try  to  maintain  the  aggregate  institutional 
cost  contribution  set  by  the  Rate  Commission.    At  any  point  in  time,  the  prices  in 
effect  would  be  available  to  all  users  of  the  category,  thus  avoiding  any  undue 

*•    The  Postal  Service  should  consider  what  impact,  if  any,  the  selected  price 
would  have  on  its  "double  p>ostage"  rule.    The  Postal  Service's  suspension  of  the 
operati(m  of  the  Private  Express  Statutes  for  extremely  urgent  letters  includes  a 
conclusive  presvunption  of  urgency  if  the  amount  paid  for  private  carriage  is  at 
least  three  dollars  or  double  3ie  applicable  USPS  postage,  whichever  is  greater. 
39  C.F.R.  §  320.6(c). 



C.      Rates  for  Large  Volume  Users 

Competitors  of  the  Postal  Service  provide  discounts  for  large  volume  users 
of  overnight  mail  jmd  they  discoimt  in  other  small  parcel  markets.    The  Task 
Force  believes  that  it  would  be  advantageous  for  the  Postal  Service  similarly  to  be 
able  to  offer  discount  rates  for  large  volume  shipp)ers  provided  the  rates  charged 
include  a  reasonable  contribution  to  institutional  costs.    The  Service  may  thereby 
gain  additional  business  and  earn  additional  contribution  to  its  fixed  institutional 
cost.    A  major  issue  with  discounting  rates  for  large  volume  customers  has  been 
discrimination.    Under  most  discounting  schemes,  a  single  piece  customer  pays 
more  than  a  large  volume  customer,  even  though  there  is  no  showing  that  it  costs 
the  Postal  Service  less  on  a  per-piece  basis  to  serve  the  large  user.    Where  rate 
differentials  as  between  customers  are  not  based  on  cost  differences,  they  must 
have  some  other  adequate  justification. 

As  a  solution  to  the  problem,  the  Task  Force  believes  that  the  Postal  Service 
and  the  Postal  Rate  Commission  should  consider  the  use  of  declining  block  rates 
for  competitive  services  to  improve  the  price  competitiveness  of  these  services  for 
high  volume  shippers  who  frequently  have  more  alternatives  available  than  lower 
volume  shippers.    Under  such  a  rate  structure,  the  rates  for  any  weight  and 
distance  cell  in  the  rate  structure  would  be  of  the  general  form: 

Customer's  Volume  Rate  per  piece 

1    -    100  pcs/period  10 

101    -    200  pcs/period  8 

201    -    500  pcs/period  5 




The  principles  underlying  this  type  of  rate  structure  relate  to  differential 
recovery  of  fixed  service  costs  and  institutional  cost  contribution  across  the  rate 
structure  based  in  part  on  market  considerations.    There  is  precedent  for  this  type 
of  rate  structure  %vithin  past  utility  regulatory  practice.    The  advantage  of  declining 
block  rates  is  that  die  small  volume  user  is  not  charged  more  than  the  large 
volume  user  for  pieces  falling  in  die  initial  block.    It  thus  "rewards"  the  high- 
volume  user  specificallif  for  its  higher  usage  level  without  discriminating  against 
low  vcriume  users. 

Rates  recommended  by  the  Commission  within  this  structure  should 
conform  to  the  Task  Force's  rate  bands  reconunendation  which  should  provide  the 
Postal  Service  significant  flexibility  to  adjust  to  changing  n\arket  conditions  quickly. 
Prices  charged  would  be  the  same  for  all  users  of  a  rate  category  at  any  time. 

D.      Classification  for  Competitive  Products 

Changing  markets  also  require  that  the  Postal  Service  be  able  to  make  rapid 
adjustments  in  the  terms  of  service  (or  product  featiires)  for  competitive  products. 
Chapter  V  of  this  report  recommends  that  the  Commission  adopt  new  procedures 
to  expedite  minor  dassification  cases.    These  procedures  are  meant  to  apply  to  all 
postal  classifications  (both  competitive  and  noncompetitive)  and  we  think  they 
adequately  address  the  problem  of  making  rapid  classification  changes  for 
competitive  services. 





A.      Introduction 

Explicitly,  the  rate  and  classification  procedures  are  mechanisms  for 
accommodating  change  in  the  Nation's  postal  system.    Underlying  much  of  the 
work  of  the  Task  Force  has  been  a  shared  sense  that  these  adniinistrative 
mechanisms  for  change  need  to  be  reexamined  and,  as  appropriate,  re-calibrated  to 
what  is  a  noticeably  accelerating  pace  of  change  in  the  world  of  the  1990s. 

The  Postal  Service  remains  a  vital  factor  in  the  Nation's  commerce  and  its 
personal  lines  of  communication,  delivering  services  now  valued  at  nearly  $50 
billion  p)er  year.    Its  customers  exf)ect  it  both  to  restrain  its  costs  and  to  improve, 
not  degrade,  its  responsiveness  to  their  diverse  and  changing  needs.    Many 
commercial  users  see  the  Postal  Service  as  a  critical  supplier  whose  services  can 
make  the  difference  in  their  struggle  to  stay  competitive  within  their  own  dynamic 
markets.    Despite  the  partial  monopoly  provided  by  the  Private  Express  Statutes, 
users  of  most  p>ostal  services  are  able,  to  various  degrees,  to  consider  competing 
services,  indirect  substitutes,  or  lower  levels  of  usage  if  postal  services  do  not  meet 
their  needs.    In  several  areas  competitive  alternatives  are  reported  to  be  growing. 
As  a  break-even  network,  the  Postal  Service  must  spread  a  substantial  overhead 
burden  among  its  users.    Successful  participation  in  its  most  dearly  competitive 
markets  will  help  the  Postal  Service  minimize  rate  increases  to  all  its  customers. 
Growth  in  its  noncompetitive  markets,  moreover,  may  lessen  the  burden  of 
institutional  costs  on  all  users. 

At  this  stage  it  is  apparent  that  neither  the  public,  nor  commercial  mailers, 
nor  the  Postal  Service  itself  is  satisfied  with  what  has  been  achieved  to  date  in 
reorienting  the  Postal  Service  into  a  fully  responsive,  dynamic  service  institution. 
Since  postal  reorganization  im{>ortant  strides  have  been  made  by  introducing  a 



range  of  work-sharing  programs,  with  rate  discounts,  which  have  provided  cost 
savings  for  tfte  users  of  the  particular  services  and  volume  and  revenue  growth 
for  the  postal  system  as  a  whole.    Service  innovations  of  sinular  impact  may  well 
be  possible  in  other  areas. 

The  Task  Force  has  imderstood  its  job  as  one  of  examining  administrative 
procedures  to  see  if  they  can  be  made  more  conducive  to  responsive  iimovation. 
The  pace  of  change  in  the  marketplace  and  the  complexity  of  the  markets  served 
by  the  Postal  Service  put  a  premium  on  timeliness  and  flexibility  in  adjusting  rates 
and  services.    By  law,  postal  rate  and  classification  proposals  are  independently 
evaluated  by  the  Postal  Rate  Commission  through  formal  evidentiary  procedures 
intended  to  serve  important  values  such  as  fairness  and  opermess.    Within  those 
procedures,  the  Postal  Service  caimot  expect  to  match  the  degree  of  flexibility  and 
immediacy  that  most  private  businesses,  or  even  its  principal  competitors,  have  in 
changing  prices  and  services.    The  Task  Force  has  fovind  that  opportunities  do 
exist,  nonedteless,  for  improving  the  receptivity  of  the  existing  postal  rate  and 
classification  processes  to  efforts  by  the  Postal  Service  to  be  more  responsive  and 
more  appn^niately  iimovative  within  the  markets  it  serves. 

We  are  not  looking  for  ease  of  change  per  se,  but  for  mechanisms  which 
both  assure  needed  review  and  timely  participation  of  all  viewpoints  and  still  are 
simple  and  prompt  enough  to  keep  transaction  costs  from  discouraging  change. 
The  measures  we  recommend  are  designed  to  bring  more  relevant  information  to 
the  decisional  process,  assure  the  right  of  all  to  be  heard,  and  produce  an  end 
product  that  is  genuinely  attuned  to  market  needs  and  serves  the  public  interest. 

In  general  our  approach  is  to  reocmunend  new  procedural  rules  for  a 
number  of  specialized  proceedings,  more  specifically  and  narrowly  suited  to  the 
consideration  of  proposals  for  innovations  of  various  types.    Our  reconunendation 
is  that  dte  Postal  Rate  Commission  develop  detailed  rules  for  these  procedures 
with  full  participation  by  interested  parties.    We  also  urge  that  the  Postal  Service 



take  the  steps  required,  in  dose  cxx>peration  with  its  customers,  to  make  prompt 
and  effective  use  of  these  procedures  once  they  are  in  place. 

The  Task  Force  recommends  the  following  new  procedures: 

1.  accelerated  procedures  for  market  tests 

2.  multi-year  cost  coverage  for  new  service  introduction 

3.  fast-track,  yes-or-no  review  for  provisional  services 

4.  expedited  review  of  service  agreements 

5.  expedited  minor  classification  cases. 

These  recommendations  are  described  in  more  detail  in  the  remainder  of  this 

B.       Specific  Recommendations 

1.         Accelerated  Procedures  for  Market  Tests 

A  broadly  recognized  deficiency  is  the  lack  of  a  "well-worn  path"  for 
obtaining  information  on  potential  service  innovations  through  limited  trials  with 
actual  ]x>stal  customers.    The  current  statute  does  not  deal  explicitly  with  service 
experiments,  apart  from  the  standard  procedures  for  establishing  rates  smd 
classifications;  an  attempt  by  the  Postal  Service  to  offer  an  experimental  service 
unilaterally  was  enjoined  in  1978,  for  lack  of  statutory  authorization.^     While  the 
Postal  Rate  Commission  has  adjusted  rules  for  mail  classification  proposals 

=    United  Parcel  Service  v.  U.S.  Postal  Service,  455  F.  Supp.  857  (E.D.  Pa.  1978), 
affirmed,  604  F.2d  1370  (3d  Cir.  1979),  cert,  denied,  446  U.S.  957  (1980). 



involving  experimental  changes,  the  level  of  preparation  and  justification  required 
can  inv(dve  the  delay  of  an  ex(>erimental  offering  by  as  much  as  a  year.    Extensive 
use  of  these  rules  for  testing  of  potential  new  services  has  not,  in  fact,  occurred. 

The  Tadc  Force  recommends  an  adaptation  of  rules  for  the  consideration 
of  mail  classification  proposals  to  allow  market  data  to  be  obtained  from 
limited  tests  to  improve  the  information  base  for  evaluating  a  proposed  change. 
In  many  situations  the  data  obtainable  from  limited  market  trials  will  be  far 
su(>erior  to  market  surveys  or  other  research.    In  such  cases,  building  in  a  testing 
opportimity  as  an  integral  part  of  the  mail  classification  procedure  will  enhance 
the  quality  of  the  record  and  the  opportimity  for  all  interested  parties  to  evaluate 
the  proposed  change.    Our  recommendation  involves  a  carefully  limited  testing 
procedure  requiring  advance  review  by  the  Commission  within  a  record 
proceeding  under  rules  to  be  established  pursucmt  to  its  general  rulemaking 
authority  imder  section  3603  of  title  39.    The  rules  should  establish  reasonable 
limits  concerning  the  scope,  scale,  and  duration  appropriate  for  testing.    The 
procedure  would  work  as  foUows. 

a.  Preparation  and  filing.    When  the  Postal  Service  finds  that  a  service 
innovation  is  worth  exploring,  but  needs  the  actual  experience  of  a  market  test  (in 
one  or  several  variations)  to  fully  support  a  proposal  for  a  permanent  classification 
change,  it  would  file  with  the  Commission  a  general  description  of  the  proposed 
change  along  with  a  market  testing  plan.    The  Postal  Service  would  also  stipulate 
that  the  proposed  testing  period  would  extend  the  time  for  considering  any 
temporary  classification  change  under  its  authority  based  on  the  filing. 

b.  Initial  action  of  Commission.    The  Commission  would  take 
jurisdiction  of  the  case  under  a  mail  classification  docket.    It  would  then  conduct  a 
prelinunary  inquiry  on  the  record,  with  interested  parties  invited  to  participate,  to 
validate  Ae  proposed  market  testing  plan.    The  inquiry  would  lead  to  a 
declaratory  order  accepting  or  not  accepting  the  proposed  test. 



c         Matters  reviewed.    The  Commission  would  limit  its  inquiry  on  the 
testing  plan  along  the  lines  of  the  following  issues  — 

•  Does  it  describe  a  genuine  test,  so  that 
advance  review  is  properly  limited? 

•  Is  it  likely  to  provide  the  data  needed  in  the 

•  Does  it  involve  imdue  discrimination, 
vmlawful  pricing,  or  other  legal  defects? 

•  Is  it  structured  in  a  way  which 
urmecessarily  or  vmreasonably  harms 
competitors  or  other  postal  customers? 

The  Task  Force  has  in  mind  that  the  shaping  of  the  test  should  be  the 
responsibility  of  postal  management.    The  public  interest  in  encouraging  the  testing 
of  new  ideas  and  adaptations  is  served  if  the  Commission  extends  considerable 
leeway  to  the  Postal  Service,  while  protecting  against  abuse. 

d.  Expedition.    The  regulations  should  provide  for  the  Commission  to 
complete  the  testing  inquiry  and  order  within  60  days. 

e.  Procedvires.    The  Commission's  hearing  procedures  would  apply  to 
the  testing  inquiry  phase.    The  Commission  would  have  to  enforce  the  discipline 
necessary  to  limit  the  inquiry  to  issues  properly  relevant  to  the  test,  if  the  process 
is  not  to  break  down.    (The  parties  would  retain  their  opportunity  to  address 
issues  relating  to  a  permanent  classification  change  later  in  the  proceeding,  as 
discussed  in  paragraph  g  below.) 

f.  Siispension  of  classification  proceeding.    If  the  Commission  approves 
a  market  testing  plan,  further  proceedings  under  the  docket  would  be  suspended 
while  the  test  is  conducted,  except  for  the  receipt  of  periodic  reports  for  the 
proceeding  record. 



g.         Resumption  of  proceeding.    At  the  end  of  the  testing  period  —  or 
once  the  test  has  provided  sufficient  data  —  the  Postal  Service  could  elect  to 
continue,  revise,  or  wiJidraw  its  classification  prop>osal  based  on  its  evaluation  of 
the  data  obtained.    If  the  proceeding  is  resumed,  the  hearing  would  lead  to  the 
usual  recommended  decision  to  the  Governors.    The  test  should  be  permitted  to 
continue  (but  not  expand)  until  a  final  decision  is  reached  so  that  the  participating 
customers  will  not  face  an  interval  of  withdrawn  service. 

2.         Multi-Year  Cost  Coverage  for  New  Service  Introduction 

In  practice,  opportunities  for  new  service  innovation  are  restricted  by  the 
single-year  test  period  which  has  typically  been  vised  in  establishing  postage  rates. 
Sometimes  a  new  service  can  entail  substantial  initial  expenditures  for  equipment, 
marketing,  or  other  introductory  investments.    It  cannot  generate  sufficient 
volumes  to  cover  those  expenditures  in  its  first  year  or  two  as  customers  first  are 
made  aware  of  the  service  and  begin  to  react  to  it.    If  the  service  is  successful, 
volume  growth  should  increase  cost  coverage.    But  development  of  a  mature 
service  may  take  several  years. 





Corti     > 


0                12                 3               4                                       1 


New  Product  -  Costs  vs  Revenues  Over  Tune 

If  the  ratemaking  process  tries  to  set  prices  to  break  even  over  relatively  short  periods, 
an  otherwise  promising  new  offering  could  be  priced  too  high  from  the  start  to  succeed, 
so  that  the  net  contribution  it  might  have  earned  later  is  lost  to  the  system. 

The  Task  Force  recommends  that  the  Postal  Rate  Commission  adopt  rules 
providing  for  a  multi-year  break-even  period  of  at  least  foiir  or  five  years  for 
proceedings  involving  new  service  offerings,  which  would  be  expected  to  cover  costs 
for  the  period  as  a  whole.  We  view  the  process  as  involving  the  following  elements. 

a.  The  Postal  Service  should  select  the  introduction  period  it  finds  appropriate 
for  each  new  service  emd  should  present  and  explain  in  its  filing  a  multi-year  plan  for 
achieving  appropriate  cost  coverage  over  the  period  as  a  whole. 



b.  The  Commission  should  establish  its  timetable  for  considering  the 
case  based  on  a  target  of  90  to  150  days  for  issuing  a  recommended  decision, 
depending  on  die  issues  involved. 

c        The  process  should  recognize  the  fact  that  new  ventures  involve  risk. 
A  flourishing  program  of  service  innovation,  which  fills  needs  and  helps  to  hold 
down  rates  for  other  services,  will  probably  involve  some  false  starts,  in  addition 
to  successful  new  services. 

d.        The  Postal  Service  should  recognize  its  responsibility  to  minimize  its 
losses  by  requesting  changes  or  terminations  when  it  sees  expectations  unfulfilled. 
It  should  anticipate  diat  the  general  receptivity  of  the  Commission  and  other 
participants  to  new  service  proposals  will  be  aft^ected  by  its  record  in  linuting  its 
losses  as  well  as  in  building  successes. 

3.        Fast  Track,  Yes-or-No  Review  lor  Provisional  Services 

In  some  situations  the  Postal  Service  may  see  an  opportunity  to  introduce  a 
new  service  offering  more  quickly  than  would  be  possible  through  the  nurket 
testing  or  new  service  introduction  procedures  recommended  in  this  report    To 
accommodate  tfiese  situations,  the  Task  Force  has  concluded  that  an  expedited 
procedure  should  be  available,  under  more  restrictive  terms,  for  use  in 
appropriate  circumstances.    The  Postal  Rate  Commission  should  establish  rules 
to  accommodate  the  following  faut-track  process  for  provisional  introduction  of 
new  services. 

a.         The  cmly  types  of  innovations  covered  would  be  those  which 
supplement  existing  rates  and  classifications  without  altering  any  of  them,  so  tliat 
customers  could  either  try  the  new  service  or  stick  with  the  existing  service  menu, 
or  both. 



b.        In  order  to  qualify  for  the  fast-track  process,  the  Postal  Service  should 
request  that  it  be  recommended  as  a  provisional  service  and  should  specify  an 
ending  date  in  its  filing.    The  ending  date  should  be  set  far  enough  in  the  futiire, 
perhaps  5  or  6  years,  to  allow  sufficient  time  for  completion  of  the  further  review 
outlined  in  step  h  below,  including  any  reconsideration  by  the  Commission,  final 
action  by  the  Governors,  and  court  appeals. 

c         In  general  the  Conmussion  should  limit  its  initial  consideration  to 
issues  involving  whether  the  proj)osal  would  have  a  material  adverse  effect  overall 
on  revenue  or  costs  or  pose  unnecessary  or  unreasonable  harm  for  competitors. 

d.  The  proposed  new  service  should  stand  alone  for  rate  purposes, 
regardless  of  its  relationship  to  other  classes  or  subclasses.    Gains  or  losses  in 
contribution  from  a  provisional  service  could  affect  futvire  overall  revenue 
requirements  but  should  not  be  tied  to  the  rates  for  any  particular  existing  class  or 

e.  The  Commission's  recommended  decision  should  provide  a  yes  or  no 
recommendation  on  the  mail  classification  asp>ects  of  the  Postal  Service's 
submission,  with  explanation  and  comments. 

f.  The  Commission  should  recommend  rates  for  the  provisional  service 
period  toward  the  lower  end  of  the  feasible  range.*' 

g.  The  Commission  ordinarily  should  complete  its  recommended  decision 
on  the  provisional  service  within  90  days. 

**    Since  customers  would  remain  free  to  use  the  other  services  they  already 
had  and  a  full  reexanunation  of  the  rates  and  classification  would  be  assured 
before  the  ending  date,  consideration  might  also  be  given  to  a  system  of 
recommending  a  rate  floor,  with  the  Service  having  latitude  to  vary  the  rate 



k.        After  some  experience  with  the  service,  the  Postal  Service  should 
return  to  the  Commission  by  filing  a  proposal  to  continue,  revise,  or  allow  it  to 
terminate,  in  time  for  completing  action  in  a  regular  mail  classification  proceeding, 
including  any  court  app>eals,  before  the  previously  established  ending  date  for  the 
provisional  phase  of  the  service. 

4.         Expedited  Review  of  Service  Agreements 

The  Task  Force  believes  that  the  rate  and  classification  process  should  have 
a  means  to  acconunodate  service  agreements  with  postal  customers,  varying  from 
the  general  rate  and  classification  schedules  in  ways  which  add  value  both  for  the 
customer  and  for  the  postal  system  as  a  whole.    In  specific  situations  involving 
one  customer  or  a  limited  group  of  customers,  negotiated  agreements  tailored  to 
the  particular  circumstances  might  be  more  effective  than  the  broad  schedules  in 
meeting  what  the  particular  facts  require,  so  that  the  benefits  can  be  shared 
between  the  participating  customer  and  the  postal  system. 

The  Task  Force  recommends  that  the  Postal  Service  and  the  Postal  Rate 
Commission  make  a  start  toward  addressing  this  need.    The  Commission  should 
first  establish  by  nile  procedures  for  reviewing  such  agreements,  with  a  set  of 
requirements  defining  ttie  conditions  under  which  approval  of  agreements  could 
be  recommended.    The  rules  should  provide  an  opportunity  for  interested 
parties  to  participate  in  a  hearing  on  the  proposals.    The  process  should  work 
in  the  following  manner. 

a.  A  tentative  service  agreement  between  the  Postal  Service  and  one  or 
more  custonters  involving  terms  and  conditions  describing  a  service  differing  from 
those  in  the  existing  Domestic  Mail  Qassification  Schedule  would  be  covered  by 
dus  procedure. 

b.  The  Postal  Service  would  request  a  rec(Hnmended  decision  from  the 



c         The  Commission  would  proceed  on  an  expedited  schedule  which 
should  be  completed  within  60  days. 

d.  The  filing  would  show  estimated  costs  and  revenues  under  the 
service  agreement. 

e.  The  analysis  should  establish  that  net  contribution  toward  covering 
institutional  costs  of  the  postal  system  would  be  increased  by  implementing  the 

f.  In  its  recommended  decision  the  Commission  should  either  approve 
or  not  approve  the  agreement  as  submitted. 

g.  If  adopted  by  the  Governors,  the  terms  of  the  agreement  should 
become  available  to  any  other  customer  in  jxjsition  to  add  as  much  value  to  the 
postal  system  in  the  same  way. 

5. ,       Expedited  Minor  Qassification  Cases 

Currently  a  classification  case  focusing  on  one  narrow  proposal  may  take  as 
long  to  complete  as  an  omnibus  rate  case  does.    The  data  and  other  requirements 
for  the  initial  filing  are  the  same  whether  a  classification  case  is  relatively  complex 
or  relatively  simple,  although  waivers  of  particular  requirements  are  sometimes 
requested  and  granted.    The  Task  Force  recommends  that  the  Commission 
provide  a  streamlined  version  of  its  rules  for  a  separate,  expedited  classification 
track  for  handling  appropriately  limited  proposals.    These  rules  should  target  the 
case  for  a  90-150  day  proceeding  and  dispense  with  filing  requirements  not  needed 
for  a  narrowly  focused,  limited  change.    The  types  of  proposals  for  which  an 
expedited  procedure  is  appropriate  might  include  changes  in  mailing  requirements, 
eligibility  standards,  and  categories  of  service  with  low  aggregate  cos&  and 




Overview.    Policy  differences  over  certain  aspects  of  the  recent  omnibus  rate 
case  have  created  an  impression  of  severely  strained  relations  between  the 
Governors  and  the  Comnussioners.'*    The  issue  in  danger  of  being  obscured,  in 
our  opinion,  is  that  ongoing  interaction  between  the  two  bodies  —  apart  from 
major  rate  and  classification  proceedings  —  has,  in  reality,  been  minimal  in  the 
years  since  reorganization.    Various  pronouncements  that  have  captured  the 
public's  attention,  therefore,  may  be  less  symptomatic  of  strain  than  of  the  virtual 
absence  of  interagency  communication. 

There  are  several  reasons  for  this.    It  is  understandable,  for  example,  that 
the  effort  each  agency  had  to  expend  on  starting  up  in  the  seventies  siphoned 
energy  from  the  type  of  mutual  undertakings  we  now  think  are  p>ossible. 
Litigation-focused  proceedings  at  the  Commission,  furthermore,  tended  to  foster 
comjjetition  rather  than  cooperation  throughout  the  eighties.    In  their  early  stages 
new  regulatory  statutes  tend  to  present  problems  in  the  distribution  of 
responsibilities  which  must  be  ironed  out  before  communication  can  be  as  open  as 
is  desirable.    The  maturation  of  the  postal  system  today,  however,  provides  an 
important  opportunity  for  the  Postal  Service  and  the  Rate  Commission  to  cooperate 
on  matters  of  mutual  concern  in  the  1990s. 

The  key  to  improved  relations  between  the  two  bodies  charged  with 
responsibility  over  p)ostal  matters  rests  in  the  assumption  by  the  Governors  and 
the  Commissioners  of  direct  responsibility  for  establishing  and  fostering  new  lines 

^    See,  for  example,  letter  of  January  10,  1992  from  Chairman  Clay 
transmitting  questions  to  the  Commission  (following  the  Commission's  appearance 
at  an  oversight  hearing  before  the  Committee  on  Post  Office  and  Civil  Service  of 
the  U.S.  House  of  Representatives). 



of  communication  fully  within  the  letter  and  spirit  of  the  ex  parte  restrictions. 
With  this  objective  in  mind,  we  recommend  that  the  Governors  and  the 
Commissioners  take  three  initial  steps  toward  developing  the  true  "partnership" 
contemplated  by  the  Postal  Reorganization  Act. 

The  first  step  —  which  we  consider  essential  to  the  success  of  the  others  — 
entails  a  dearer  exposition  of  the  scope  and  application  of  the  ex  parte  rules. 
Their  scope,  indeed,  has  often  been  seen  as  broader  than  it  really  is  —  to  the 
detriment  of  useful  communication.    The  second  involves  joint  participation  in  an 
annual  meeting  and  sponsorship  of  symp>osiums  tailored  to  ratemjiking  concerns. 
The  third  entails  continuing  Postal  Service/Postal  Rate  Commission  staff 
cooperation  on  projects  of  mutual  long-term  concern  to  the  agencies. 

Support  for  the  position  that  cooperative  undertakings  can  co-exist  without 
abandoning  the  ex  parte  rules  can  be  found  among  commenters  in  the 
Commission  rulemaking  docket  on  the  ratemaking  process.*    The  Council  of 
Public  Utility  Mailers  (CPUM)  suggests,  for  example,  that  "Outside  of  formal  cases, 
conferences  between  the  Postal  Rate  Conunission  and  its  staff  and  the  Postal 
Service  should  be  encouraged  .  .  .  ."    At  the  same  time,  CPUM  suggests  it  would 
be  appropriate  for  the  Commission  to  maintain  a  public  log  recording  all  such 
conferences  or  meetings  and  the  general  subject  matter  addressed.   January  14, 
1992  Supplemental  Comments  at  2-3.    Similarly,  McGraw-Hill,  noting  it  is  "leery" 
of  the  Postal  Service  being  given  any  special  access  to  the  Commission  on  matters 
pending  before  the  Commission,  nevertheless  says  periodic  discussions  of  general 
policies  and  procedures  would  appear  to  be  both  useful  and  legitimate. 
Preliminary  Comments  of  McGraw-Hill,  December  30,  1992. 

Docket  No.  RM91-1,  Rules  of  Practice  and  Procedure. 



The  ex  parte  rules.    As  indicated  above,  our  review  convinces  us  that  the 
ex  parte  rules  have  not  outlived  their  usefulness,  but  continue  to  play  a  key 
statutory"  role  in  maintaining  confidence  in  the  ratemaking  process.    We  believe 
furthermore  that  judicial  proper  review  of  Commission  decisions,  fair  treatment  of 
participants,  and  public  confidence  in  the  ratemaking  process  require  on-the-record 

Notwithstanding  our  support  for  continuation  of  the  ex  parte  rules,  we 
believe  that  uncertainty  over  their  scope  may  have  unduly  hindered  legitimate 
discussion  in  the  past.    In  the  absence  of  practical  guidelines  on  permissible 
discussions,  it  appears  that  an  institutional  reluctance  to  risk  possible  error  may 
have  developed.    In  our  estimation,  such  "overapplication"  of  the  ex  parte  rules 
does  not  serve  the  ratemaking  process  well  because  needless  sUence  on  legitimate 
issues  of  mutual  concern  fosters    misunderstanding  and  suspicion. 

We  suggest  that  the  members  of  the  Board  of  Governors  and  the 
Commissioners  cooperate  at  the  earliest  opf)ortunity  on  developing  additional 
explanatory  materials  on  the  scope  of  the  ex  parte  rules.    These  materials  should 
also  be  made  available  for  broader  distribution  to  the  staffs  of  the  agencies  and  to 
the  p)ostal  community.    We  encourage  special  sessions  for  new  Commissioners  and 
Governors  and  periodic  reviews  for  all  interested  parties.    At  the  same  time,  we 
suggest  the  Governors  and  the  Commissioners  jointly  develop  a  list  of  topics  on 
which  discussions  could  begin  immediately  within  the  existing  understanding  of 
the  ex  parte  rules. 

^    The  Administrative  Procedure  Act  (5  U.S.C.  §  557(d))  and  Executive  Order 
No.  11570,  35  Fed.  Reg.  18183  (November  24,  1970)  as  amended  by  Executive 
Order  No.  12107,  44  Fed.  Reg.  1055  (December  28,  1978).    Section  3624  of  the 
Postal  Reorganization  Act  requires  compliance  with  the  due  process  provisions  of 
the  APA,  thereby  making  agency  decisionmaking  on  the  basis  of  the  public  record 
before  it. 



Joint  participation  in  an  annual  meeting.    We  also  recx>mmend  that  the 
Governors  and  the  Commission  hold  joint  annual  meetings.  In  particular,  we 
suggest  that  they  set  aside  at  least  two  days  a  year  for  substantive  working 
sessions  on  topical  postal  issues  of  mutual  interest  and  concern.    The  format 
should  include  working  sessions  devoted  to  briefings  by  Postal  Service  and 
Commission  staff  on  strategic  ratemaking  concents,  such  as  volume  and  cost 
trends,  and  on  a  broader  range  of  issues  such  as  automation  plans,  environmental 
matters,  and  international  postal  affairs. 

We  believe  that  exposure  to  opinions  from  outside  the  two  agencies  would 
be  particularly  useful.    We  therefore  recommend  that  the  annual  meeting  also 
include  sessions  at  which  special  invitees  would  discuss  matters  such  as 
congressional  actions  affecting  the  Postal  Service,  alternate  delivery,  and  changing 


Joint  sponsorship  of  ratemaking  symposiums.    In  recognition  of  their 
leadership  role  in  postal  policy,  we  recommend  that  the  Governors  and  the 
Commissioners  jointly  sponsor  symposiums  for  the  broader  postal  community  on 
topical  postal  ratemaking  issues.    We  envision  these  sessions  filling  a  gap  between 
the  offerings  of  the  large-scale  "think  tank"  seminars  and  trade  or  industry 
gatherings.    They  would  (i)  focus  on  issues  directly  related  to  ratemaking  and  (ii) 
provide  a  structured  atmosphere  for  discuission  and  debate,  but  one  relatively  free 
of  the  constraints  imposed  by  the  litigation-style  orientation  of  practice  before  the 
Commission.    We  make  no  specific  recommendations  on  topics,  but  suggest  that 
omnibus  rate  cases  provide  a  rich  source  of  possible  issues.'^    We  also  suggest  the 
Governors  and  the  Commissioners  consider  publication  of  selected  ref)orts. 

Staff  commimications.    We  extend  our  recommendation  for  improved 
communications  to  the  agency  staff  level  as  well.    Our  suggestions  take  three  main 

^     One  example  would  be  an  assessment  of  the  impact  of  third-class  mail 
destination  entry  discounts  on  mailer  behavior. 



forms  at  this  time,  but  we  encourage  development  of  additional  ideas  for  workable 
programs  from  all  sources,  including  intervenors  in  Commission  proceedings. 

We  suggest  periodic  staff  discussions  on  current  concerns  and  briefings  on 
future  directions.    Although  these  sessions,  at  times,  may  mirror  concerns 
addressed  at  annual  joint  Governors/Commissioners  meetings,  we  urge  attention  to 
"nuts  and  bolts"  practice  issues,  particularly  those  that  could  lay  the  groundwork 
for  later  rulemaking  proceedings.    An  important  area  for  discussion  includes 
cooperation  on  developing  a  mutually  acceptable  process  for  understanding  and 
replicating  methodologies  underlying  various  agency  filings.    In  our  view,  the  case- 
related  aspect  of  this  undertaking  entails  ex  parte  considerations  which  should  be 
included  in  the  broader  review  mentioned  above.    On  a  more  informal  basis,  we 
also  suggest  joint  seminars  where  the  two  staffs  could  hear  from  knowledgeable 
sources  both  inside  and  outside  the  Postal  Service. 

We  recommend  as  well  expanded  opportunities  for  Commission  staff 
attendance  at  joint  Postal  Service/industry  exchanges,  such  as  meetings  of  the 
Mailers  Technical  Advisory  Committee  (MTAC).    In  particular,  we  suggest  that 
MTAC  extend  an  invitation  to  the  Commission  to  send  a  PRC  staff  representative 
to  its  meetings  in  an  "observer"  capacity.    This  would  allow  the  Commission  to  be 
kept  informally  apprised  of  the  general  direction  of  mailer  interests.    We  further 
suggest  that  the  Commission  consider  assigning  this  responsibility  to  its  Office  of 
the  Consumer  Advocate.    We  also  urge  consideration  of  other  areas  for  staff 
exchange  and  cooperation,  such  as  opportunities  for  the  Commission  to  view 
Postal  Service  training  materials. 

It  also  occurs  to  us  that  there  may  be  a  legitimate  need  for  a  mechanism 
permitting  the  Postal  Service  and  the  Commission  to  address  case-spedfic 
questions  related  to  methodologies  during  pendency  of  consideration  by  the 
Governors.    The  relatively  short  tenure  of  our  Task  Force  has  not  allowed  us  to 
explore  this  matter  in  sufficient  detail  to  make  a  specific  recommendation,  but  we 
supjxjrt  general  discussion  of  options  that  would  effectively  allow  clarification  of 



issues  that  may  warrant  further  explanation  and  allow  speedier  resolution  of  nninor 
substantive  issues.    One  device  that  warrants  study  is  a  letter  from  the  Governors 
identifying  major  concerns.    Any  such  mechanism,  of  course,  would  have  to 
preserve  the  open,  on-the-record  character  of  the  dedsioned  process. 

Several  Docket  No.  RM91-1  commenters,  including  Dr.  John  Haldi  and  the 
PRC  Consumer  Advocate,  have  urged  that  testimony  and  other  case  materials  be 
made  available  on  magnetic  or  electronic  media.    We  strongly  endorse  this 
proposal  as  a  means  of  providing  rapid,  wide  access  to  data  used  in  postal 
ratemaking.    We  believe  the  Postal  Service  should  make  available  in  electronic 
form  the  Cost  and  Revenue  Analysis  rep>ort  and  its  other  published  data  used  in 
preparing  its  rate  case  submissions. 

As  noted  above,  the  presentation  of  case  data  by  the  Postal  Service  in  the 
format  approved  by  the  Commission  in  the  prior  rate  case  —  along  with  any 
revised  format  the  Service  wishes  to  urge  upon  the  Commission  —  would  make 
case-to-case  trends  in  volumes,  costs  and  other  series  much  more  readily 
understandable  to  the  growing  number  of  firms  and  intervenors  relying  upon  such 



IPA  Recommendations 
For  Governors'  Action 

Redefine  Classes  of  Mail /Type  of  Service 

Redesign  USPS  Budgeting  and  Financial  Planning  Systems 

Higher  retirement  benefit  costs/related  rate  impact 

Replace  contingency  and  prior  years  loss  with  capital  maintenance  reserve 

Disconnect  collective  bargaining  and  rate  cycles 

Add  to  Governors'  resources 

Governors  to  regard  PRC  as  resource  for  review  of  complex  policy  decisions 

Establish  "stand-alone"  core  costs 

B.       Mailer  Recommendations  for  PRC  Follow-up 

In  Docket  No.  RM91-1,  Rules  of  Practice  and  Procedure,  the  Postal  Rate 
Commission  asked  for  comments  and  suggestions  on  how  its  Rules  could  be 
amended  to  simplify  the  ratemaking  process.    Many  of  the  suggestions  have  been 
addressed  by  the  Task  Force,  but  those  on  the  following  list,  it  was  concluded, 
were  best  left  to  PRC  follow-up. 

The  Task  Force  believes  the  items  listed  can  best  be  considered  for  adoption 
by  the  PRC,  the  Postal  Service,  and  parties  in  conferences.    We  recommend  the 
PRC  initiate  such  conferences  as  a  part  of  Docket  No.  RM91-1. 




The  Task  Force  has  made  an  independent  study  of  the  problems  confronting 
the  postal  system,  and  so  we  have  not  necessarily  addressed  all  the  suggestions 
offered  by  others  for  alleviating  these  problems.    In  particular,  there  are  certain 
recommendations  and  suggestions  made  in  the  IPA  report,  or  submitted  by  mailers 
and  other  commenters  in  Docket  No.  RM91-1,  which  the  Task  Force  believes  can 
best  be  evaluated  and  adopted  or  rejected  either  by  the  Postal  Service  or  by  the 
Postal  Rate  Commission.    In  order  to  place  our  own  work  in  context,  we  have 
tabulated  them  in  this  chapter. 

The  Task  Force  also  concluded  that  there  were  four  proposals,  originating 
outside  of  our  own  study,  that  required  legislation  to  implement;  these  are  also 
listed  in  this  chapter. 

A.      IPA  Recommendations  for  Governors'  Action 

The  Task  Force  did  not  develop  concrete  proposals  for  the  IPA 
recommendations  shown  below. 

Except  for  the  Icist  one,  all  of  the  listed  recommendations  are  within  the 
province  of  the  Board  of  Governors  to  decide  or  delegate  for  decision  to  their  top 
management.    We  assume  that  the  Board  will  take  under  consideration  the 
adoption  and  implementation  of  these  recommendations  if  it  finds  them  in  the  best 
interest  of  the  Service. 

The  last  recommendation  would  require  joint  Postal  Service  and  PRC  action. 



The  number  in  brackets  indicates  the  number  of  times  that  suggestion  was 
made  by  different  parties. 

Another  repeated  suggestion  is  that  the  Postal  Service  file  a  "Commission 
version"  of  the  Cost  and  Revenue  Analysis  Report  and  the  Cost  Segments  and 
Components  Report.    In  other  words,  these  reports  would  be  filed  in  a  rate  case  on 
the  basis  of  costing  methods  approved  by  the  Commission  in  the  immediately 
preceding  general  rate  case.    This  suggestion  has  been  included  in  the  Task  Force's 
four-year  strategic  rate  process  proposal. 

Mailer  Recommendations 
For  FRC  Follow-up 

PRC  limit  its  inquiry  in  rate  cases  to  sf)edfic  designated  issues 

Limit  number  of  interrogatory  responses  admitted  to  record  (3) 

Eliminate  reply  briefs  (2) 

Clarify  rights  and  obligations  of  different  categories  of  participants 

Shorten  time  for  intervention  and  discovery  (3) 

Eliminate  affidavits  for  interrogatories  (3) 

Expedited  procedure  for  correcting  errors  in  decisions 

PRC  publish  list  of  issues  that  will  not  be  considered 

Discourage  non-substantive  transcript  corrections 



Testimony  and  other  documents  (including  PRC  decisions)  available  in 
magnetic  media 

Filing  date  on  first  page  of  all  motions,  interrogatories,  etc. 

Only  responses  to  discovery  be  served  on  all  parties 

PRC  indicate  issues  to  be  addressed  in  oral  arguments 

Cut  motion  practice  through  good  faith  effort  to  solve  discovery  disputes 

USPS  place  evidence  for  preparation  of  case  in  public  file  while  preparing 

Studies  requested  become  minimum  requirements  for  next  case  filing  unless 
USPS  could  "show  cause" 

Advance  notice  of  departures  from  approved  ratemaking  principles 

All  data  to  be  used  in  a  general  rate  case  should  be  filed  two   months  prior 
to  filing  case 

Technical  conferences  prior  to  case  on  data  from  studies  to  be  used  in  case 

PRC  have  and  exercise  j)ower  to  take  official  notice  after  close  of 
evidentiary  record 

As  an  outgrowth  of  commenter  suggestions,  a  PRC  "practice  manual"  to 
codify  existing  procedures  and  facilitate  discussion  of  improvements 



C.       Recommendations  Requiring  Legislation 

The  Task  Force  concentrated  on  recommendations  requiring  no  legislation. 
This  reHects  our  overall  conclusion  that  a  great  deal  can  be  achieved  by  using  the 
inherent  flexibility  of  the  existing  law.    Only  four  out  of  the  principal  suggested 
changes  the  Task  Force  considered  would  require  legislation  to  implement.    These 

IPA  Suggestions 

•  Redefine  role  of  competitors  in  ratemaking  process 

•  Redefine  breakeven 

•  Elinunate  second  round  of  rate  case  reconsideration 

Mailers'  Suggestions 

•  PRC  to  have  subpoena  and  final  decision  powers 

The  Task  Force  takes  no  position  either  for  or  against  these  four  proposals 
but  if  experience  demonstrates  legislative  change  is  needed  then  the  Task  Force 
urges  all  parties  to  agree  and  approach  Congress  unified. 




While  it  is  not  known  when  the  next  omnibus  rate  case  will  be  filed  it  is 
necessary  to  make  some  assumptions  in  order  to  schedule  implementation  of  the 
Task  Force  recommendations  if  these  recommendations  are  adopted  by  the  Postal 
Service  and  the  Rate  Commission.    If  the  four  year  -  two  step  rate  cycle 
recommendation  is  adopted  it  is  essential  that  the  next  rate  case  be  based  on  it  as 
time  will  erode  the  impetvis  for  change  not  only  for  this  recommendation  but  for 
all  others. 

Accordingly  the  Task  Force  suggests  the  proposed  rules  for  the  foxir  year  - 
two  step  Rate  Cycle  and  the  Competitive  Services  be  issued  by  June  30,  1992  and 
finalized  by  August  15,  1992.    This  schedule  should  provide  all  parties  with 
adequate  advance  notice  of  the  procedures  to  be  used  in  the  next  omnibus  rate 

Rulemaking  to  implement  recommendations  covering  Innovative  and  New 
Service  Offerings  and  Responsiveness  to  Market  Needs  should  be  scheduled  to 
start  around  August  15  in  order  to  be  completed  by  the  end  of  1992. 

Commencement  of  rulemakings  to  institutionalize  select  Costing 
Methodologies  may  be  deferred  until  after  the  next  omnibus  rate  case. 



Mr.  LeBlanc.  But  it  says  in  the  executive  summary  on  page  2, 
"The  task  force  acknowledged  a  legitimate  need  for  the  Postal  Serv- 
ice to  respond  in  a  timely  fashion  to  changing  market  conditions 
and,  therefore,  recommends  certain  things"  in  certain  competitive 
classes.  That's  out  of  context. 

We  talked  about  Express  Mail,  Parcel  Post,  and  heavjrweight  Pri- 
ority Mail.  We  recommended  a  band  of  rates  that  would  be  put  into 
effect  that  would  allow  the  Postal  Service  to  adjust  up  or  down.  We 
came  up  with  other  suggestions,  such  as  accelerated  procedures  for 
market  tests — they  have  got  a  new  market  product  they  want  to 
throw  out  on  the  market — multi-year  cost  recovery  of  new  service 
introductions.  We  talked  about  a  lot  of  expedited  classification 

We  put  this  out  for  comment.  The  Postal  Service,  in  effect,  said 
they  did  not  want  to  comment  on  it.  So,  in  my  way  of  looking  at 
this,  we  have  done  a  lot  to  at  least  get  the  door  open.  Now,  if  we 
want  to  come  up  with  some  further  comments,  it's  at  least  out 
there  for  somebody  to  take  up. 

Mr.  Sanford.  Thank  you  for  the  thoroughness  of  your  answer. 
One  other  quick  question,  if  I  may,  Mr.  Chairman? 

Mr.  McHuGH.  By  all  means. 

Mr.  Sanford.  And  that  is,  it  was  brought  to  my  attention  that 
the  remote  bar  code  system  has  been  tried,  in  essence,  sort  of  on 
an  experimental  basis  with  private  contractors.  And  now,  it's  going 
to  be  changed  so  that  it  will  be  taken  over  by  Postal  Service  em- 
ployees. My  guess  is  that  having  private  contractors  do  this  would 
have  been  less  expensive — why  are  we  shifting  over  to  have  Postal 
Service  employees  take  over  that  function? 

Mr.  Gleiman.  That's  a  decision  made  by  postal  management.  We 
have  nothing  to  do  with  the  actual  operation  of  the  Postal  Service 
on  a  day-to-day  basis.  And  let  me  say,  taking  off  my  hat  as  a  Rate 
Commissioner  and  putting  on  my  hat  as  a  former  congressional 
staffer,  that  I  had  occasion  to  look  at  a  remote  video  encoding  a 
number  of  years  ago.  And  there  were  some  serious  questions  raised 
at  that  time  both  on  the  Hill  and  by  the  General  Accounting  Office 
and,  I  think,  in  the  Postal  Service  records  about  the  extent  to 
which  there  would  be  a  positive  return  on  investment  for  that 
project  even  in  its  experimental  stages  when  it  was  contracted  out. 

I  understand  that  the  GAO  issued  a  report  last  week  which 
raises  questions  about  whether  there's  going  to  be  any  positive  re- 
turn on  the  investment,  given  the  P,MG's  unilateral  decision  which 
was  not  required  by  any  rules  or  regulations  and  certainly  wasn't 
required  by  the  Postal  Rate  Commission. 

Mr.  Sanford.  Were  you  going  to  say  something,  Mr.  Haley? 

Mr.  Haley.  No,  sir.  I  was  answering.  The  chairman  has  done 
very  well  on  that. 

Mr.  Sanford.  Thank  you. 

Mr.  McHUGH.  I  thank  the  gentleman.  I  would  acknowledge  and 
welcome  the  presence  of  the  gentlelady  from  Florida,  Mrs.  Carrie 
Meek.  Welcome.  And  I  would  happily  yield  to  her  for  any  questions 
or  statements  she  might  like  to  make. 

Mrs.  Meek.  I  do  have  a  question,  Mr.  Chairman.  I  sit  on  the 
Budget  Committee,  and  a  lot  of  talk  has  been  going  on  in  that  com- 
mittee regarding  privatization.  And  it  certainly  has  lots  of  implica- 


tions  for  the  Postal  Service  and,  of  course,  your  commission,  as 

I  understand  your  purview  does  not  reach  to  that  particular  cat- 
egory in  terms  of  privatizing;  is  that  right?  Privatization.  You  do 
not  get  into  that  realm. 

Mr.  Gleiman.  That's  correct. 

Mrs.  Meek.  My  next  question  has  to  do  with — ^your  job,  as  I  see 
it,  is  to  set  postal  rates  based  on  all  the  data  and  everything  that 
you  can  put  together;  is  that  correct? 

Mr.  Gleiman.  That's  correct.  If  I  could  go  back  to  your  first  ques- 
tion. You  know,  the  word  "privatization"  is  a  funny  word.  It  means 
a  lot  of  different  things  to  a  lot  of  different  people.  I'm  not  sure 
when  people  throw  it  around  what  they  mean. 

In  fact,  if  by  "privatization,"  you  mean  contracting  out  work  that 
was  previously  done  in-house  in  the  Postal  Service,  while  the  Rate 
Commission  is  not  the  direct  moving  party,  it  does  get  involved  in 
contracting  out  in  the  sense  that  we  consider  and  approve  discount 
rates  when  work  is  shared  with  mailers.  In  other  words,  mailers 
might  presort  or  prebarcode  mail  instead  of  having  it  come  in  raw 
to  the  Postal  Service,  where  it  would  be  handled  by  clerks.  So,  in 
that  sense,  we're  minor  participants  in  the  contracting  out  arena. 
But  I  honestly  don't  know  what  privatization  means.  I  always  ask 
people,  "What  do  you  mean  by  that?" 

Mrs.  Meek.  Well,  I  won't  go  into  that,  since  it's  not  within  your 
purview.  They  gave  us  so  many  definitions  as  to  what  it  means. 
But  in  terms  of  your  capacity  as  a  commission,  how  much  impact 
studies  do  you  make  before  you  go  into  consideration  of  raising 

Mr.  Gleiman.  The  Postal  Service  submits  a  proposal  to  us.  That's 
the  beginning  of  the  process.  And  their  proposal  more  often  than 
not  contains  detailed  studies  and  cost  information,  perhaps  not  as 
many  studies  as  we  would  like,  and  perhaps  not  information  that's 
as  good  or  as  current  as  we  would  like.  But  it  is  the  Postal  Service 
that  provides  the  bulk  of  the  information. 

And  then,  we  have  kind  of  a  back-and-forth  between  the  partici- 
pants, the  Postal  Service,  and  the  Rate  Commission,  where  we  all 
delve  into  one  another's  positions  and  try  to  develop  more  informa- 
tion on  the  public  record  that  is  then  used.  But  the  bulk  of  the  data 
collection  is  in  the  hands  of  the  Postal  Service.  They're  the  ones 
who  know  what's  going  on. 

Mrs.  Meek.  Thank  you.  Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  I  thank  the  gentlelady. 

Let  me  return  to  the  comments,  the  observation  on  the  report 
from  Mr.  LeBlanc.  Am  I  correct  in  assuming  that  those  rec- 
ommendations would  not  have  required  statutory  authority,  that 
those  things  were  in  their  entirety  able  to  be  implemented  by  rule 
or  reg? 

Mr.  LeBlanc.  That's  correct.  They're  not  statutory  by  any 

Mr.  McHUGH.  And — I'm  sorry,  Mr.  Haley,  did  you  want  to 

Mr.  Haley.  I  think,  Mr.  Chairman,  that  perhaps  some  of  the  rec- 
ommendations may  have  required  some  statutory  possibilities,  but 
there  are  certainly  many  of  them  that  did  not. 


Mr.  McHUGH.  There  were  at  least  some  that  didn't  require  statu- 

Mr.  Haley.  Very  much.  Yes,  sir. 
Mr.  McHUGH.  Let's  deal  with- 

Mr.  Gleiman.  Let  me  referee  and  say  that  the  bulk  of  the  rec- 
ommendations did  not  require  a  statutory  change. 

And,  as  a  matter  of  fact,  on  the  most  major  of  the  recommenda- 
tions, one  which,  by  the  way,  would  have  given  the  Postal  Service 
the  ability  to  make  periodic  interim  adjustments  reflecting  infla- 
tion, something  the  PMG  talked  about,  there  was  actually  a  notice 
of  proposed  rulemaking  issued  by  the  Rate  Commission.  It  was  be- 
fore my  time,  but  I  think  it  was  either  in  the  summer  or  the  fall 
of  1992.  The  Postal  Service  summarily  rejected  the  offer  to  estab- 
lish these  new  rules.  It  was  called  a  "two-by-four,"  where  there 
would  be  a  big  rate  case  every  4  years,  full-blown,  with  all  the  data 
and  everything.  And  in  the  intervening  period,  there  would  be  an 
adjustment— the  "two"  part  of  the  "two-by-four"— an  adjustment  to 
reflect  inflationary  factors. 

The  Postal  Service,  I  mentioned,  shelved  the  whole  task  force  re- 
port. And  with  respect  to  the  most  major  recommendations,  the 
two-by-four,  the  Postal  Service  dismissed  it,  saying  it  was,  "incon- 
sistent with  the  direction  in  which  postal  management  was  mov- 
ing," whatever  that  means. 

Mr.  McHUGH.  So  whether  they  required  statutory  authority  or 
not,  it's  fair  to  say  that  across  the  board,  the  Postal  Service  failed 
to  act  on  any  of  these  initiatives? 

Mr.  Gleiman.  Not  only  did  they  fail  to  act  on  any  of  these  initia- 
tives, but  I  have  been  surprised  in  my  discussions  with  senior  post- 
al officials  over  the  last  few  months  to  learn  that  most  of  them  do 
not  even  know  of  the  existence  of  this  very  fine  task  force  report 
which  their  Board  of  Governors  and  some  of  my  colleagues  who 
were  there  before  I  came  participated  in. 

I've  asked  them  to  take  it  off  the  shelf,  dust  it  off,  and  let's  use 
it  to  get  on  with  the  business  of  doing  business. 

Mr.  McHuGH.  Commissioner  LeBlanc,  did  I  see  you  wishing  to 
add  to  the  discussion? 

Mr.  LeBlanc.  I  guess  as  a  point  of  clarification,  it  was  my  under- 
standing—and I  want  to  make  sure  that  I'm  right.  I  don't  want  to 
mislead  the  committee  or  subcommittee.  But  the  task  force  was  put 
out  initially  so  that  no  statutory  requirement  would  be  needed;  in 
effect,  this  could  be  done  by  communication  between  us  and  the 
Postal  Service. 

It  was  my  understanding,  also,  some  of  the  things  that  were  on 
there  might  have  been  extended  or  broadened,  if  you  will,  to  make 
some  statutory  changes.  But  I  just  want  to  make  sure  I  clear  the 
air  there. 

Mr.  McHUGH.  I  appreciate  that  distinction.  I  think  the  salient 
point,  for  the  purposes  of  this  discussion,  is  that  whether  they  re- 
quired statutory  authority  or  not,  the  recommendations  would,  I 
believe,  in  your  collective  opinion — certainly  my  opinion  at  first 
blush — and  I  want  to  imderscore  it  as  only  first  blush — would  have 
greatly  enhanced  and,  indeed,  pursued  the  objectives  that  the  Post- 
al Service  has  outlined  as  desirable  before  this  subcommittee. 


And  yet,  they  failed  to  act  either  through  the  regulatory  channels 
or  failed  to  act  in  requesting  legislation  to  implement  those  that 
may  have  required  it. 

And  it  seems  at  least  interesting  to  me  that  in  your  testimony, 
Chairman  Gleiman,  beyond  this  example,  you  talked  about  on  a 
number  of  occasions  the  provision  of  expedited  process  for  Express 
Mail  that  I  believe  you  said  the  Postal  Service  failed  to  act  on  with- 
in 5  years  and  cited  a  number  of  other  examples  where  in  spite  of 
all  the  talk  about  the  need  for  increased  flexibility,  the  Postal  Serv- 
ice has  repeatedly  rejected  overtures  to  pursue  that.  Is  that  a  fair 
observation  on  my  part? 

Mr.  Gleiman.  That's  a  pretty  fair  observation.  Could  I  just  add 
one  more  little  bit  of  information? 

Mr.  McHuGH.  Please. 

Mr.  Gleiman.  We  have  this  big  reclassification  case  that  we  un- 
derstand is  going  to  be  coming  to  us.  We  read  about  it  in  the  trade 
press  all  the  time,  although  we  have  not  had  any  direct  dealings 
with  the  Postal  Service. 

Mr.  McHuGH.  I'll  tell  you  sometime  how  I  learned  I  was  going 
to  be  chairman  of  this  subcommittee.  [Laughter.] 

Mr.  Gleiman.  The  Governors  of  the  Postal  Service,  according  to 
Federal  Register  notice,  are  going  to  make  a  decision  on  what  to 
file  with  us  next  week,  I  guess  it  is,  on  the  5th  or  6th  of  March. 
The  die  will  be  cast  at  that  point.  We  won't  have  a  case  before  us, 
but  the  decision  to  file  it  will  have  been  made. 

Well,  I  got  a  bootleg  copy  yesterday  of  a  memo  dated  February 
28,  "Memorandum  for  Reclassification  Committee."  The  Reclassi- 
fication Committee  encompasses — probably  a  bunch  of  people  sit- 
ting behind  me  who  are  mailers  on  the  Reclassification  Committee. 
I  wouldn't  be  so  presumptuous  as  to  suggest  that  the  commission 
should  have  been  on  the  Reclassification  Committee,  because  we 
have  to  sit  in  judgment,  ultimately,  and  we  should  not  have  been 
involved  on  the  front  end. 

But  here  you  have  a  meeting  that  the  Postal  Service  is  going  to 
hold  where  it  has  invited  people.  The  meeting  is  so  large  that  the 
Postal  Service  has  had  to  rent  the  Arlington  Ballroom  of  the  Crys- 
tal Gateway  Marriott  Hotel.  There  will  be  no  ex  parte  walls  at  that 

If  we  really  wanted  to  cooperate  and  we  really  wanted  to  share 
information  and  they  really  wanted  us  to  understand  so  that  we 
could  expedite  this  case,  perhaps — it  may  only  be  a  week  or  2 
weeks  involved  here;  but  still,  a  couple  of  weeks  is  a  couple  of 
weeks — they  could  have  extended  an  invitation  to  the  Postal  Rate 
Commission  staff;  and  if  not  the  Postal  Rate  Commission  staff  be- 
cause of  concerns  about  ex  parte  rules,  certainly  to  the  Office  of  the 
Consumer  Advocate,  which  becomes  a  participant  in  the  case,  along 
with  all  the  folks  who  are  on  the  Reclassification  Committee. 

I  think  it's  a  shame  that  we  can't  develop  a  higher  level  of  co- 
operation. And  again,  I  think  it  has  got  to  be  a  two-way  street  here. 

Mr.  McHuGH.  Thank  you. 

Mr.  Gleiman.  Maybe  some  of  our  people  will  get  invited  now.  I 
don't  know. 

Mr.  McHuGH.  Well,  I'm  sure  your  comments  will  be  made  known 
to  them  in  one  fashion  or  another.  I  obviously  have  other  questions 


I  would  like  to  pursue,  but  I  would  like  to  yield  to  the  gentleman 
from  Texas,  Mr.  Green,  who  has  rejoined  us. 

Mr.  Green.  Thank  you,  Mr.  Chairman.  I  didn't  realize  I  was 
going  to  get  back  to  some  questions.  Let  me  continue  to  follow  up. 
And  I  guess  this  is  a — some  of  us  who  are  new  on  the  committee 
and  our  second  term  in  Congress,  even,  are  learning  the  structure 
and  the  procedure  of  the  Postal  Service  and  the  Postal  Rate  Com- 
mission and  Board  of  Governors. 

And  in  visiting  with  a  number  of  people,  I  understand  the  frus- 
tration. And  I  was  just  reading  your  study  or  your  recommendation 
that  you  talked  about  from  November.  Is  that  the  study  you  men- 
tioned in  your  testimony  earlier,  November  30?  That's  not  the  rec- 
ommendation? It  was  in  your  statement  at  the  Postal  Rate  Com- 
mission on  November  30,  some  of  the  recommendations  that 

Mr.  Gleiman.  I  believe  you're  looking  at  a  summary  of  the  rate 
case  decision,  if  it's  November  30. 

Mr.  Green.  Yes.  That's  correct. 

Mr.  Gleiman.  The  study  that  has  been  referred  to  a  couple  of 
times  during  the  questions  is  Postal  Ratemaking  in  a  Time  of 
Change.  It  was  a  June  1992  report  that  dealt  with  efforts  to 
streamline  the  rate-setting  process. 

Mr.  Green.  And  I  guess  we're  still  learning,  and  that's  why  I  ask 
questions  about  if  there  was  a  way  that  you  could — you  know, 
there  is  no  flexibility  now  in  providing  for,  at  least  as  far  as  I 
know — and  you  may  correct  me — that  if  there  was  competition,  and 
I  know  the  concern  you  have  about  competing  to  match  private 
business,  because  they  may  have  lower  costs,  in  some  cases. 

And  we  don't  want  to  have  first  class  stamps  providing  any  more 
support  than  what  it's  already  doing,  but  allowing  the  post  office 
maybe  to  compete  and  see  just  how  it  works.  Are  there  any  exam- 
ples now  that  they  have  that  ability  to  have  that  flexibility  that  the 
Postmaster  General  has  said? 

Mr.  Gleiman.  It's  interesting  that  you  should  ask.  First,  let  me 
just  say  as  a  precursor  that  they  do  have  flexibility  now.  It  doesn't 
take  10  months  or  1  year  or  14  months.  Every  time  I  hear  it  in 
a  speech  from  someone,  it  seems  to  get  a  little  bit  longer.  Pretty 
soon,  we're  going  to  take  longer  for  a  rate  case  than  it  takes  to  de- 
liver a  baby  elephant,  I  guess. 

But  there  are  rules  now.  Express  Mail,  they  can  change  those 
rates  in  90  days.  We  have  a  90-day  procedure — no  more  than  90 
days.  And  for  experimental  efforts,  there's  an  expedited  5-month 
proceeding,  no  more  than  5  months.  So  there  are  some  rules  on  the 
record  now. 

But  there  is  an  area  where  the  Postal  Service  gets  to  compete. 
It's  the  international  arena.  The  Postal  Service  has  the  rate-setting 
authority  in  the  international  arena.  And  it's  kind  of  interesting. 
They  haven't  fared  that  well.  Their  volume  and  their  contribution 
to  Postal  Service  overhead  has  not  increased,  and  they're  in  a  vir- 
tually unfettered  free  market  situation  there. 

And  as  far  as  experimental  services  go,  there's  one  experimental 
service  that  they  tried  in  the  international  arena  that  I'm  familiar 
with.  I  looked  at  it  years  ago  when  I  was  a  staffer  on  the  Govern- 
ment Operations  Committee.  It  was  something  called  Intelpost.  It 


was  their  way  of  getting  into  the  high-tech  area.  It  was  an  inter- 
national facsimile  transmission  service. 

It  was  an  experiment.  It  ran  for  5  years  before  we  took  a  look 
at  it.  In  those  5  years,  the  Postal  Service  invested  $6  million — 
which  doesn't  sound  like  a  lot  of  money  in  the  overall  scheme  of 
things — and  they  grossed  $60,000  in  revenue  on  this  experiment. 

And  until  the  Congress  started  to  beat  on  them  about  it,  they 
had  no  intention  and  no  interest  whatsoever  of  making  any 
changes  that  would  make  it  more  cost  effective. 

After  the  Government  Operations  Committee  issued  a  report — 
and  I  can  provide  a  copy  of  that  report  to  the  subcommittee — until 
that  report  was  issued  and  the  Postal  Service  was  embarrassed 
into  doing  something  with  this  wonderful  experiment  of  theirs,  they 
were  happy  to  run  it  forever  and  not  make  any  money.  Six  million 
dollar  investment,  $60,000  gross  revenue. 

Mr.  Green.  It  sounds  like  some  of  the  property  I  bought  in 

Mr.  LeBlanc.  Congressman,  I  would  just  Uke  to  just  expound  on 
that  1  second.  First  of  all,  you  may  or  may  not  be  familiar,  but  they 
borrow  money  at  the  Fed  rates,  good  or  bad;  they  do  not  license 
their  vehicles;  they  do  not  pay  property  tax  on  40,000  retail  outlets; 
and  that  alone  is  a  sizable  amount  of  money.  So  I  just  wanted  to 
put  that  into  the  record. 

Mr.  Green.  Thank  you,  Mr.  Chairman. 

Mr.  McHUGH.  Thank  you.  I  would  just  say  to  Members  now  here, 
those  who  may  come  in,  if  we  can  relay  that  information,  if  they 
would  at  any  time  ask  for  time,  I  would  certainly  be  happy  to  share 
that  with  them,  rather  than  just  turning  every  5  minutes  or  so  and 

Let  me  return  to  the  topic  that  we  were  discussing  earlier  where- 
by the  Postal  Service  has  not,  in  the  opinion  of  some,  in  any  way 
accessed  the  flexibility  that  they  currently  have  available  to  them 
or  that  has  been  offered  to  them.  I'll  pose  a  simple  question.  Why 
do  you  think  they  have  failed  to  act  in  those  areas,  the  1992  report, 
the  Express  Mail  flexibility?  What  might  be  the  reason,  in  your 

Mr.  Gleiman.  I  can  only  guess.  And  I  think  that  perhaps  as  it 
was  indicated  in  comments  that  they  made  in  response  to  the  rule- 
making on  the  joint  task  force  report,  that  they  had  other  priorities 
and  other  ways  that  they  wanted  to  try  and  do  things.  But  I  don't 

Listen.  You  know,  I  understand  the  Postal  Service.  If  I  were  in 
charge  of  the  Postal  Service,  not  only  would  I  do  a  worse  job  than 
the  Postmaster  General  does  now  or  any  other  Postmaster  General 
has  ever  done,  but  I  also  would  want  to  be  out  from  under  any  con- 
trol whatsoever.  I  mean,  that's  just  natural  for  people  not  to  want 
to  be  controlled  by  someone  else  or  to  be  held  accountable  by  any- 
one else. 

I  don't  know  whether  it  has  been  the  feeling  all  along  that  they 
could  cut  a  better  deal  on  their  own  or  not.  I  just  don't  know.  I 
don't  want  to  attribute  those  kinds  of  motives.  Let's  just  say  they 
had  other  fish  to  fry. 

Mr.  McHuGH.  Well,  leaving  the  past,  then,  let's  return  to  the 
present.  You  mentioned  in  your  testimony  that  you  are,  indeed,  en- 


gaged  in  discussions  currently  with  the  PMG  to  develop  new  initia- 
tives on  flexibility.  Are  you  optimistic  that  these  discussions  will 
prove  more  productive  and  more  utilized  than  those  in  the  past? 
How  is  it  going? 

Mr.  Gleiman.  I'm  optimistic,  depending  on  which  day  of  the 
week  you  catch  me. 

Mr.  McHuGH.  Today  is  Thursday.  [Laughter.] 

Mr.  Gleiman.  Well,  I  think  if  we  can  get  the  rhetoric  out  of  the 
way  and  cut  to  the  chase  that  yes,  we  can  do  some  things.  But 
again,  we  can't  do  things  in  isolation  in  a  back  room  somewhere. 
There  are  other  people  who  have  an  interest.  Interestingly  enough, 
not  everybody  has  the  same  view  of  the  world  as  the  Postal  Serv- 
ice. Even  the  large  mailers  who  sometimes  agree  with  them  on 
rates  and  issues  don't  always  agree  with  the  Postal  Service  in 
terms  of  the  flexibility  it  affords. 

But  if  we  can  get  down  to  some  specifics,  then  we  can  deal  with 
them.  But  we're  going  to  have  to  deal  with  them  in  the  public  rule- 
making venue,  so  that  everybody  who  is  affected  or  could  be  af- 
fected is  going  to  have  a  chance  to  take  a  shot  and  make  a  state- 
ment about  the  good  and  bad  of  what  we're  proposing. 

We  can't  under  the  law — and  we  shouldn't  whether  there's  a  law 
or  not — ^go  into  the  back  room  and  cut  deals  that  are  going  to  work 
to  the  advantage  or  disadvantage  of  one  party  or  another  without 
giving  everybody  a  shot.  There's  too  much  at  stake  here.  Our  postal 
system  is  really  important  to  this  country.  It  is  intertwined  with 
our  lives,  business  and  personal,  every  day  of  the  week.  As  much 
as  I  grouse  about  the  Postal  Service,  I  have  a  lot  of  respect  for  it, 
and  I  think  it's  really  important.  And  I  would  like  to  do  things  that 
will  improve  the  lot  of  the  Postal  Service,  make  it  better,  and  make 
it  better  for  all  of  us.  And  that  includes  finding  ways  to  make  the 
process  less  adversarial,  not  as  lengthy,  not  as  cumbersome.  And 
I  certainly  don't  want  to  get  to  the  point  where  we're  having  rate 
cases  that  go  so  long  that  we  deliver  babies  before  we  deliver  rate 

Mr.  McHuGH.  Let's  talk  about  that  for  a  moment.  The  law  pro- 
vides for  10  months,  as  I  understand  it,  for  you  to  do  your  job.  That 
in  the  past  has  pretty  much  been  the  standard  until  your  first  rate 
case,  where  you  came  in  and  chopped  off  1  full  month,  brought  it 
down  to  9  months.  First  time  in  the  history  of  the  process. 

Do  you  think  that  you  totally  stretched,  totally  compressed  that 
process  to  the  greatest  extent  possible,  given  your  charge  under  the 
law?  We  hear  so  much  and  from  so  many  about  how  that  seems 
to  be  an  unreasonable  amount  of  time,  until  they  look  at  or  till  the 
internals  of  that  process  are  considered. 

We  want  to  protect  the  fairness  and  the  openness,  but  is  there 
anything  we  can  do  to  achieve  that  end  and  still  make  it  quicker 
by  law?  How  can  this  committee  help? 

Mr.  Gleiman.  Let  me  mention  that  the  standard  until  1976  was 
no  standard  at  all.  The  10-month  provision,  as  I  recall,  was  put 
into  the  law  in  1976.  I  think  I'm  right  on  the  date,  and  if  I'm  not, 
I'll  correct  it  for  the  record.  But  before  then,  rate  cases  could  go  on 
interminably.  And,  in  fact,  there  was  one  rate  case  that  dragged  on 
for  a  couple  of  years. 


The  rate  case  that  we  had  this  last  time  out  was  unique  in  a  lot 
of  ways.  Some  of  the  uniqueness  made  it  more  difficult  to  deal 
with,  and  some  made  it  easier  to  deal  with.  Some  of  the  issues 
were  more  complicated,  but  there  were  fewer  parties  who  were  act- 
ing participants  in  this  rate  case.  And  the  staff  will  probably  hiss 
and  boo.  I  think  maybe  we  could  have  shaved  a  little  bit  more  out, 
but  not  much  more.  And  I  don't  know  how  much  we  can  shave  out 
in  the  future.  The  question  is,  who  wants  to  give  up  what? 

I'll  give  you  an  example,  the  discovery  part  of  the  process.  The 
Postal  Service  was  required  in  this  last  rate  case  to  respond  to 
questions  that  were  put  to  it  about  its  rate  case  that  it  filed  with 
us.  They  were  required  to  respond  in  14  days.  In  previous  rate 
cases,  the  Postal  Service  was  given  21  days  to  respond. 

The  Postal  Service  was  very  unhappy  about  giving  up  that  extra 
7  days,  but  requiring  them  to  give  up  that  extra  7  days  bought  us 
1  week  of  those  5  weeks.  If  nobody  wants  to  give  anything  up,  then 
it's  hard  as  the  dickens  to  chop  time  out. 

Mr.  McHuGH.  Do  you  think  the  loss  of  that  week  in  any  way 
compromised  the  quality  of  the  process  and  the  fairness  of  the  out- 

Mr.  Gleiman.  Well,  the  Postal  Service  complained  that  it  didn't 
have  enough  time  to  respond  to  interrogatories  and  filed  a  number 
of  requests  to  respond  late,  all  of  which  we  approved.  I  don't  think 
you  can  go  any  shorter  than  14  days.  I  don't  want  to  make  an  abso- 
lute statement,  but  to  cut  the  Postal  Service  or  other  parties  in 
terms  of  their  response  time  to  less  than  14  days  could  impact  on 
the  quality  of  the  responses  you  get.  And  you  are  dealing  with  ana- 
l5rtical  data  here,  complicated  data  here.  There  are  a  lot  of  interrog- 

I  don't  remember  the  number  that  the  Postal  Service  got,  but 
there  were  a  heck  of  a  lot  of  them.  And  it's  tough  for  them  to  re- 
spond to  all  of  these  interrogatories  in  14  days.  So  I  don't  know 
whether  we  could  go  any  lower.  Maybe  we  can  try  14  again  if 
they're  willing  to. 

There  are  some  other  ways  that  you  could  probably  improve  the 
process.  For  example,  I  spoke  before  somewhat  tongue-in-cheek 
about  this — well,  maybe  not  so  tongue-in-cheek — about  this  meet- 
ing that's  going  to  be  held  over  at  this  ballroom  in  the  hotel  in  Vir- 
ginia. And  it  might  be  that  we  couldn't  participate  unless  it  was 
open  to  the  general  public.  I  don't  know.  But  I'm  not  sure  that's 
all  that  bad. 

But  if  our  staff  at  this  juncture  could  gain  some  insights,  could 
start  to  look  at  material,  if  they  could  hear  the  questions  that  other 
interested  parties  are  asking  about  what  the  Postal  Service  is  plan- 
ning to  file  with  us,  it  might  help  us  at  the  front  end  in  terms  of 
analyzing  the  details  of  the  Postal  Service  case.  Maybe  we  could 
shave  a  little  bit  of  time  out  at  the  front  end.  I  don't  know. 

Mr.  McHuGH.  Let  me  pose  a  possibility.  And  I'm  not  necessarily 
advocating  this,  but  we're  here  today  to  ask  questions  and  discuss 
the  issues.  You  expressed  a  concern  earlier  in  your  testimony  that 
you  had  grave  problems  with  the  quality  of  the  data  being  supplied 
by  the  Postal  Service.  That  data  is  absolutely  essential  to  the  proc- 
ess of  making  a  rate  determination.  I  would  suspect,  although  I 


don't  know,  the  failure  to  be  able  to  provide  that  data  in  a  timely 
fashion  adds  measurably  to  the  process. 

How  would  you  respond  to  a  requirement  that  in  those  areas 
where  there  is  a  monopoly  provided  for  the  Postal  Service — in  other 
words,  not  in  those  areas  where  they're  in  direct  competition  with 
the  private  sector,  but  in  the  areas  that  are  covered  by  the  Express 
Mail  statutes — if  the  data  and  2JI  the  proprietary  information  that 
the  Postal  Service  has  available  is  open  to  the  public  under  Free- 
dom of  Information  365  days  a  year,  might  that  not  in  the  first  in- 
stance encourage  the  Postal  Service  to  do  a  better  job  of  compiling 
that  data  as  a  management  tool?  Because  I  believe  you  suggested 
that  it  seemed  to  be  largely  absent. 

And  might  it  not  also  greatly  facilitate  future  requests  during 
rate  proceedings  for  that,  without  substantially  compromising  their 
position  because  of  their  monopoly  position? 

Mr.  Gleiman.  Well,  it  would  be  helpful  to  us  if  the  Postal  Service 
filed  the  information  that  our  current  rules  require  them  to  file  in 
a  timely  manner.  It  would  be  helpful  when  the  Postal  Service 
changes  a  data  collection  system  to  inform  us  that  they  are  chang- 
ing a  data  collection  system,  as  our  rules  currently  require,  so  that 
we  could  keep  abreast  of  things. 

I'm  kind  of  a  Freedom  of  Information  junkie.  I  believe  all  govern- 
ment information  should  be  open  to  the  public,  unless  it  meets  one 
of  the  criteria  for  withholding  that  the  law  provides.  I  think  the 
Postal  Service  would  be  aghast  at  the  idea  of  making  all  of  its  in- 
formation available  generally  to  the  public  or  to  the  Postal  Rate 
Commission  on  a  daily  basis  365  days  a  year. 

But  I  think  that  if  they  would  deliver  their  data  in  a  more  timely 
way  and  consistent  with  our  rules,  that  certainly  would  make  our 
jobs  easier.  By  the  way,  let  me  tell  you  something  that  happened 
in  the  last  rate  case.  I've  been  thinking  about  this  a  lot  lately,  and 
it  has  me  upset. 

The  Postal  Service  has  an  outside  auditor  that  comes  in  and 
every  year  audits  their  balance  sheet.  You  see  that  in  the  back  end 
of  the  Postmaster  General's  Annual  Report.  And  there  was  a — I 
don't  have  it  with  me.  I  don't  remember  which  footnote  it  was.  But 
there's  a  footnote  in  there.  There's  an  adjustment  in  their  balance 
sheet  that  they  just  sent  up  for  this  past  year.  And  it  has  to  do 
with  their  accrued  worker's  compensation  liability. 

Almost  all  last  year  while  we  were  doing  the  rate  case,  the  Postal 
Service  was  looking  at  its  accrued  worker's  comp  liability.  Some- 
where along  during  the  course  of  the  year,  the  Postal  Service  deter- 
mined that  its  accrued  liability  in  this  area  was  overstated  by  $850 
million.  It  is  a  long-term  liability.  It's  spread  out  over  a  number  of 

But  one  of  those  years  that  it's  spread  out  over  and  impacts  on 
is  the  current  year.  If  the  Postal  Service  had  been  more  forthcom- 
ing, more  willing  to  have  that  data  audited  at  an  earlier  time  and 
made  that  information  available  to  the  Rate  Commission  before 
rather  than  a  couple  of  weeks  after  our  evidentiary  record  closed, 
it  is  conceivable  that  we  could  have  had  lower  rate  increases. 

Back  of  the  envelope  calculation — and  I'm  not  real  good  at  this 
yet,  but  I'm  learning — said  that  there  was  about  $200  million  in- 
volved in  the  current  fiscal  year.  That  $200  million  is  about  2.5 


percent  on  third-class  and  second-class  mail.  We  could  have  had 
lower  rates,  possibly,  if  the  Postal  Service  had  been  more  forthcom- 

Mr.  McHuGH.  Well,  clearly,  the  better  the  data,  the  better  the 
process.  I  think  we  all  would  agree  on  that. 

You  mentioned  the  Postal  Service  would  be  aghast  if  we  required 
the  opening  up  of  their  propriety  information  in  monopoly  protected 
areas.  Would  you  be  aghast? 

Mr.  Gleiman.  I'm  having  a  definitional  problem  here.  I  think  in 
monopoly  areas,  there's  no  such  thing — I'm  shooting  from  the  hip, 
now.  And,  as  I  said,  I'm  having  a  definitional  problem.  I  think  that 
in  a  monopoly  area,  there  is  no  proprietary  information,  per  se. 

"Proprietary  information"  implies  sensitive  business  information 
and  the  like.  And  I  think  in  a  monopoly  area,  there  is  no  informa- 
tion that's  that  sensitive,  or  there  shouldn't  be.  And  the  answer  is, 
I  wouldn't  be  aghast  if  they  opened  it  up. 

As  a  matter  of  fact,  it  would  be  great  if  we  could  develop  a  rela- 
tionship with  them  where  we  could  get  their  information  on  an  on- 
going basis.  We  do  get  some  information  periodically  which  we  ana- 
lyze, and  it  would  be  useful  to  get  more. 

Mr.  McHuGH.  We'll  return  to  this,  because  I  have  a 

Mr.  LeBlanc.  Mr.  Chairman,  may  I  make  a  comment,  please? 

Mr.  McHUGH.  Yes,  Mr.  LeBlanc. 

Mr.  LeBlanc.  If  anybody  was  aghast,  there  is  another  alter- 
native, which  would  be  to  provide  the  Postal  Rate  Commission  with 
subpoena  power  during  rate  cases  for  sure  and  possibly  at  any 
other  time  during  the  years,  however,  you  would  want  to  structure 

But  that  would  be  a  way  of  keeping  possibly  both  the  proprietary 
information  proprietary,  as  well  as  allowing  us  to  get  certain  infor- 
mation that  we  need  at  a  given  point  in  time.  So  it  was  just  a 
thought  that  I  had  there,  as  far  as  that  is  concerned. 

Mr.  Gleiman.  I'm  afraid  I  would  have  to  take  exception  to  my 
colleague's  position.  I  would  much  prefer  to  have  a  better  relation- 
ship with  the  Postal  Service  and  get  the  data  that  way  than  having 
the  threat  of  subpoena  hang  over. 

My  experience  over  the  years  has  been  that  when  you  have  sub- 
poena power,  people  sometimes  expect  and  push  you  to  use  it,  and 
I'm  not  sure  if  you  can  get  things  in  a  cooperative  spirit  that  it's 
best  to  have  that  kind  of  power.  I  would  rather  try  and  work  it  out 
first,  maybe  hold  that  one  in  abeyance  for  a  while. 

Mr.  LeBlanc.  We're  independent,  as  you  can  tell. 

Mr.  McHuGH.  I'm  delighted  with  that  turn  of  events.  All  I  can 
remember  is  how  my  Dad  always  liked  to  get  me  to  do  things  in 
a  friendly  fashion,  but  I  always  knew  the  belt  was  in  the  closet, 
too.  [Laughter.] 

But,  with  that,  I  have  reflected  my 

Mr.  Gleiman.  If  you  insist. 

Mr.  McHuGH.  Well,  I  know  that  was  a  recommendation  a  num- 
ber of  years  back  by  the  commission  itself.  And  it  will  bear  further 

I've  been  remiss  in  my  duties,  if  I  may,  to  gratefully  acknowledge 
the  gentlelady  from  Michigan,  the  Honorable  Barbara-Rose  Collins, 


who  also  serves  as  a  ranking  member  of  this  subcommittee.  And 
we  thank  you  for  being  here. 

Miss  Collins.  Thank  you  very  much,  Mr.  Chairman.  I  apologize 
for  being  late  to  this  hearing.  However,  I  have  three  hearings  at 
the  same  time,  and  another  one  was  very  urgent.  And  I'm  familiar 
with  the  Postal  Rate  Commission. 

So  I'm  not  going  to  take  up  much  time  with  questions.  I  would 
like  to  ask  if  my  opening  statement  can  be  introduced  for  the 

[The  prepared  statement  of  Hon.  Barbara-Rose  Collins  follows:] 

Prepared  Statement  of  Hon.  Barbara-Rose  Collins,  a  Representative  in 
Congress  From  the  State  of  Illinois 

I  am  very  pleased  to  join  you,  Mr.  Chairman  in  participating  in  this  oversight 
hearing  on  the  Postal  Rate  Commission.  I  would  like  to  welcome  Chairman  Edward 
Gleiman  and  the  Commissioners  before  the  new  Postal  Service  Subcommittee. 

As  you  know,  last  week  this  subcommittee  heard  testimony  from  Postmaster  Gen- 
eral Runyon  and  the  GAO.  Mr.  Runyon  specifically  called  upon  Congress  to  reexam- 
ine the  Postal  Reorganization  Act  of  1970  in  order  to  facilitate  needed  changes.  Mr. 
Runyon  indicated  his  desire  to  deregvdate  the  U.S.  Postal  Service  by  shortening  and 
simplifying  the  rate  setting  process,  providing  volume  discounts  and  freedom  to  in- 
troduce new  products  in  a  more  timely  manner.  He  called  his  proposal  commer- 
cisdization  not  privatization  of  the  Postal  Service. 

We  are  very  interested  to  hear  your  views  today  and  your  concerns  regarding 
postal  rate  flexibility,  competitive  product  offerings  and  the  financial  stability  of  the 
Postal  Service. 

Similarly,  we  en>ect  to  learn  how  reform  of  the  rate  setting  process  would  impact 
the  Postal  Serviced  historical  mission  to  collect  and  deliver  Uie  mail  in  an  efficient 
and  timely  manner  and  how  any  such  reform  would  strengthen  the  Postal  Service's 
position  in  an  increasingly  competitive  environment. 

Again,  welcome.  I  look  forward  to  your  testimony. 

Mr.  McHuGH.  Without  objection. 

Miss  Collins,  Thank  you.  I'm  interested  in  knowing,  what  are 
your  thoughts  on  the  privatization  of  the  United  States  Postal 
Service,  and  how  would  that  affect  the  Postal  Rate  Commission,  or 
have  I  missed  your  statement  to  that  effect? 

Mr.  Gleiman.  I  don't  think  we  really  spoke  to  privatization,  per 
se.  I  did  say  in  response  to  a  question  earlier  from  Congresswoman 
Meeks  that  I  have  great  difficulty  with  that  term.  I  don't  know 
what  it  means.  I  hear  it  thrown  around  a  lot,  and  I  hear  a  lot  of 
people  give  different  kinds  of  definitions. 

And  I  have  problems  responding  to  questions  about  privatization 
unless  people  tell  me  exactly  what  they  mean.  And  I  know  that's 
not  a  word  that  you  throw  around  or  that  you  are  suggesting 

Miss  Collins.  I  don't  know  what  it  means,  either.  And  Post- 
master General  Rimyon  coined  another  one,  "commercialization." 
So  I  don't  know  what  the  difference  is  between  that,  either.  But  I 
just  wondered  what  you  thought. 

Mr.  Gleiman.  I'm  not  sure  of  all  that  fancy  stuff.  But  let  me  tell 
you,  I  think  that  the  Postal  Service  is  real,  real  important  to  this 
country.  It  fascinates  me  that  the  Postal  Service  operates  as  well 
as  it  does.  I  know  that  we're  all  quick  to  criticize  the  Postal  Serv- 

When  you  think  about  125  million  addresses  in  this  country  from 
which  aiid  to  which  mail  of  various  sizes,  shapes,  and  forms  can 
go  6  days  a  week,  500  million-plus  pieces  a  day,  it  is  fascinating 
that  the  system  gets  anything  an)nvhere  ever. 


I  kind  of  put  mail  when  I  think  about  it  in  the  same  context  as 
telephones  and  televisions  and  computers;  I  know  they  work  most 
of  the  time,  but  I  don't  know  how  they  work.  So  I  think  that  we 
have  to  keep  in  mind  that  we  have  got  this  enormously  valuable 
system  that's  intertwined  with  our  everyday  life,  our  business  life 
and  our  personal  lives. 

And  I  think  that  my  personal  view — I  don't  know  how  my  col- 
leagues feel  about  this,  but  my  personal  view  is  that  whatever  they 
talk  about  with  privatization,  if  they  mean  splitting  it  up  and  sell- 
ing it  in  bits  and  pieces  or  taking  the  whole  thing  in  bits  and  pieces 
and  giving  it  to  some  private  party,  I'm  not  in  favor  of  it. 

I  don't  think  that  the  country  would  be  well-served.  I  don't  think 
that  we  would  have  universal  service.  And  I  don't  think  we  would 
have  uniform  rates.  And  let  me  say  about  uniform  rates,  I  remem- 
ber reading  some  time  ago  in  the  Roll  Call  that  there's  a  Member 
of  Congress  who  found  somebody  who  would  deliver  letters  here  on 
the  Hill  to  his  colleagues  for  5  cents  a  pop.  And  he  thought  that 
was  great,  and  it  is.  But  I  dare  say  that  whoever's  delivering  those 
letters  for  5  cents  a  pop  in  these  three  House  office  buildings  is  not 
going  to  carry  that  Member's  letters  back  to  his  district  for  5  cents 
a  pop.  I'll  bet  you  that  carrier  won't  even  do  it  for  32  cents  a  pop. 
And  I'll  bet  you  that  that  Member's  constituents  who  will  want  to 
write  him  about  something  and  ask  for  him  to  intercede  in  a  prob- 
lem that  they're  having  with  the  Federal  Government  or  with 
someone  else  can't  find  anybody  private  to  carry  those  letters  to 
Washington  to  him  for  32  cents. 

I'm  very  concerned  about  what  would  happen  if  we  split  this 
thing  up  and  gave  it  away  or  if  we  gave  it  away  lock,  stock,  and 
barrel.  It's  too  darn  important.  And  if  anybody  decides  that  we 
need  to  chop  it  up  or  give  it  away,  I  hope  that  the/U  think  about 
all  the  pieces  being  in  place  before  they  do  it,  because  I  would  hate 
to  think  of  all  the  creditors  I  have  not  being  able  to  send  me  their 

Miss  Collins.  Thank  you  very  much,  that's  a  very  detailed  an- 

Mr.  McHuGH.  Thank  you.  Mr.  Green. 

Mr.  Green.  Mr.  Chairman,  I  don't  have  any  more  questions.  I 
would  just  like  to  also  insert  a  statement  into  the  record. 

[The  prepared  statement  of  Hon.  Gene  Green  follows:] 

Prepared  Statement  of  Hon.  Gene  Green,  a  Representative  in  Congress 
From  the  State  of  Texas 

Thank  you,  Mr.  Chairman.  Today  we  have  the  second  installment  of  the  oversight 
of  the  Postal  Service.  Last  week  we  heard  the  testimony  of  the  Postmaster  General 
in  which  he  described  the  opportimities  and  problems  facing  the  Postal  Service.  This 
week  we  will  discuss  the  Postal  Service  with  the  body  that  considers  postal  service 
requests  for  rate  increases  and  makes  recommendations  based  on  those  requests. 

It  is  clear  the  Postal  Service  faces  enormous  challenges  in  reducing  costs  and  im- 
proving service.  As  members  of  the  commission  that  oversees  the  Post  Office,  I 
would  like  to  hear  your  views  on  the  areas  where  the  Post  Office  has  made  progress 
in  recent  years  and  where  it  has  fallen  short.  Particularly,  I  would  like  you  to  de- 
scribe in  your  view  on  what  is  driving  up  the  costs  of  the  Post  Office  and  whether 
automation  would  help. 

Mr.  McHuGH.  Without  objection,  so  ordered.  Ms.  Meek. 
Mrs.  Meek.  I  just  wanted  to  amplify  a  little  bit  what  my  col- 
league, Barbara-Rose  Collins,  just  asked  you  about  privatization. 


There  are  2iny  number  of  things  that  the  Budget  Committee  is 
looking  at.  Nothing  has  been  decided  upon,  as  far  as  the  Postal 
Service  is  concerned. 

But  all  these  various  authorities  they  have  brought  before  us 
have  issued  any  number  of  techniques  for  doing  this.  One  is  selling 
off  the  assets  which  you  presently  have,  a  one-time  selling  of  all 
of  the  assets,  retaining  the  money  from  that  and  using  it,  certainly, 
for  a  deficit  reduction. 

Another  one  is  to  sell  out  franchises  to  the  postal  workers,  the 
people  who  work  in  the  Postal  Service.  Let  them  take  over  the  post 
office,  just  as  another  Burger  King,  I  guess,  and  to  franchise  it  and 
let  them  run  the  post  office  service  and  see  if  that  will  serve  the 

The  other  one  is  contracting  out,  which  I'm  sure  you're  very  fa- 
miliar with  that  process.  And  the  other  one  that  they  recommended 
was  vouchers.  Any  number  of  things  they  have  recommended  as  to 
how  the  Postal  Service  can  save  money  and  how  it  can  be  certainly 
modernized  better  than  it  is  and  served  with  much  more  dispatch 
than  it's  presently  serving. 

They  had  experts  from  other  countries  come  in,  certainly  much 
smaller  than  the  United  States,  so  that  didn't  serve  as  a  very  good 
model.  But  I  was  interested  in  your  comments  in  that  I  assume  by 
this  time  you  are  not  very  favorable  to  any  kind  of  privatization  as 
it  currently  exists. 

Mr.  Gleiman.  Again,  I  have  problems  with  the  word  "privatiza- 
tion." It  dej>ends  what  people  mean.  I  think  that  there's  room  for 
some  contracting  out,  maybe.  But  you  have  to  look  carefully  at 
those  areas  to  make  sure  that  there's  really  a  cost  savings.  But 
generally,  I'm  troubled  by  the  idea  of  privatization  of  the  Postal 

But  you  have  to  put  that  against  the  backdrop  that  I'm  always 
fighting  with  my  wife  whenever  she  wants  to  redecorate  the  house. 
I  get  comfortable  in  that  one  easy  chair,  and  I  don't  ever  want  it 
to  change. 

Mr.  McHuGH.  I  thank  the  gentlelady.  Let  me  just  expand  very 
briefly  on  her  question.  The  subcommittee  can  assume,  then,  that 
in  general  terms,  you're  supportive  of  the  Private  Express  Statutes 
and  would  not  favor  them  being  repealed? 

Mr.  Gleiman.  I  would  say  that  generally,  we're  supportive  of  the 
Private  Express  Statutes.  Maybe  I  should  say  generally,  I'm  sup- 
portive of  the  Private  Express  Statutes.  I've  not  had  in-depth  dis- 
cussion with  my  colleagues,  and  they  may  have  different  views,  I'm 

Mr.  McHuGH.  Is  that  an  agreed-upon  statement  Mr.  Quick?  Ex- 
ercising the  independence  of  the  commission. 

Mr.  Quick.  Mr.  Chairman,  I  think  that  it's  difficult  to  consider 
the  Private  Express  Statutes  separate  from  the  so-called  sugges- 
tions that  the  Postal  Service  be  commercialized.  We  have  heard 
this  term  from  the  Postmaster  Greneral.  And  I  assume  that  this 
concept  includes  retaining  the  Private  Express  Statutes,  which  I 
think  is  fine. 

But  if  in  addition  to  that,  commercialization  concept  means  re- 
taining those  statutes,  retaining  the  monopoly,  but  giving  the  Post- 
al Service  more  freedom  to  set  rates,  I  think  that's  very  trouble- 


some,  because  that's  an  enormous  power  that  they  would  have, 
without  the  pubUc  review  they  currently  get  through  our  process. 

I  would  say  that  I  would  be  for  retaining  the  Private  Express 
Statutes,  but  not  necessarily  for  the  notion  of  commercialization,  if 
it  means  giving  the  Postal  Service  the  ability  to  set  its  own  rates. 

If  there  were  no  review  to  mailers  for  the  rates  that  they  are 
asked  to  pay — we  have  examples  that  the  chairman  cited  in  his  tes- 
timony from  our  last  case  where  they  just  flat-out  made  mistakes 
which  would  have  been  of  great  consequence  to  many  people,  par- 
ticularly small  newspaper  publishers  and  businesses  that  use  busi- 
ness reply  mail. 

In  addition,  if  they  had  the  ability  to  set  rates  without  any  public 
review  and  retain  their  monopoly,  they  have  a  tremendous  power 
to  affect  the  competition  that  goes  on  in  this  country  among  dif- 
ferent kinds  of  media  for  advertising  dollars. 

The  total  advertising  dollars  spent  estimated  by  a  man  from 
McCann-Erikson  for  this  year  is  about  $165  billion.  That's  tele- 
vision, radio,  magazines,  newspapers,  direct  mail,  and  other  kinds 
of  promotions  competing  for  that  amount  of  money. 

The  third-class  direct  mail  has  been  growing  as  a  percentage  of 
the  overall  proportion  of  that  total  amount  of  money.  And  probably 
this  year,  the  estimates  are  that  about  20  percent  of  that  amount, 
about  $32  billion,  will  be  in  the  direct  mail  area. 

Now,  if  the  Postal  Service  has  the  power  to  effect  the  rates  that 
might  give  an  advantage  to  direct  mailers,  somebody  else  in  that 
competitive  area  is  going  to  be  hurt.  It  could  be  newspapers,  it 
could  be  magazines,  it  could  be  other  kinds  of  media. 

So  I  think  that  the  commercialization  notion,  as  I  said,  if  it 
means  setting  rates  by  the  Postal  Service  and  enabling  them  to 
shift  costs  to  mailers  who  have  no  alternative,  small  businesses,  in- 
dividuals, people  like  that,  I  think  that's  a  notion  that  requires  a 
lot  of  critical  scrutiny,  because  you're  really  not  dealing  with  just 
Federal  Express  and  UPS  and  other  kinds  of  competitors.  You're 
dealing  with  how  major  segments  of  the  economy  competes  for  this 
huge  amount  of  advertising  dollars.  And  they  have  different  func- 
tions in  our  society.  Your  newspapers  in  Watertown  or  your  small 
newspapers  have  a  different  role  than  the  people  who  send  direct 
mail,  as  do  magazines. 

So  I  think  Private  Express  Statutes,  I  would  be  for  keeping.  This 
other  notion  I  think,  as  I  said,  requires  a  good  deal  of  thought  and 

Mr.  McHuGH.  Thank  you,  Mr.  Quick. 

Mr.  Gleiman.  Mr.  Chairman. 

Mr.  McHuGH.  Mr.  Chairman. 

Mr.  Gleiman.  Less  we  appear  to  be  trying  to  protect  ourselves 
or  give  answers  that  would  perpetuate  our  existence,  let  me  answer 
a  question  that  you  have  not  asked.  You  may  plan  to  ask  it.  I  don't 
know.  And  I  apologize  if  I'm  going  to  preempt  you. 

Mr.  McHuGH.  I  was  about  to  ask,  if  I  can  guess  where  you're 
going,  particularly  given  Mr.  Quick's  comments. 

Mr.  Gleiman.  It's  your  hearing,  sir. 

Mr.  McHuGH.  Are  you  an  irreplaceable  part  of  this  system? 

Mr.  Gleiman.  No,  in  a  word. 

Mr.  McHuGH.  Do  you  care  to  expand  upon  that? 


Mr.  Gleiman.  Yes,  sir.  We  don't  need  a  Postal  Rate  Commission. 
But  as  long  as  there  is  a  Government-granted  monopoly  Postal 
Service,  you  need  some  entity  somewhere  which  is  the  functional 
equivalent  of  the  Rate  Commission,  which  has  staff  who  can  take 
the  time  and  expend  the  energy  to  understand  the  numbers  in  the 
process  and  which  is  independent  of  the  Postal  Service. 

You  don't  need  to  have  a  free-standing  Postal  Rate  Commission, 
necessarily,  in  my  personal  opinion,  I  may  not  be  able  to  go  back 
to  the  office  this  afternoon.  I  may  have  a  bunch  of  angry  staffers 
and  angry  fellow  commissioners,  but  that  is  my  opinion.  You  just 
need  to  have  the  function,  and  it  has  to  be  independent,  so  long  as 
you  have  a  Government-granted  monopoly. 

Mr.  McHuGH.  Well,  I  hope  you  can  return  to  the  office  this  after- 

That  seems  to  be  a  point  at  which  perhaps  logically  we  can  call 
an  end  to  the  proceedings.  I  have  to  tell  you  that  prior  to  November 
8,  this  was  a  recurring  dream  of  mine,  where  I  would  be  sitting 
here  as  a  chairman,  no  one  to  question  my  authority.  [Laughter.] 

But,  as  all  good  dreams  do,  this  one  shall  come  to  an  end,  as 
well.  Let  me  sincerely  thank  you  all  for  again  being  so  generous 
with  your  time. 

I  have  said  on  previous  occasions  that  while  I  understand  the 
road  to  hell  is  paved  with  such  things  as  good  intentions,  it  is  the 
good  intention  of  this  subcommittee  to  try  to  be  a  facilitator  in  this 
very,  very  complex  process  of  providing  mail  service  to  the  people 
of  the  great  Nation  that  we  all  have  the  honor  of  living  in. 

We're  going  to  continue  to  hopefully  work  with  you  and  other  in- 
terested parties  to  be  a  positive  force  in  that.  In  that  regard,  we 
certainly  look  at  this  as  the  first  step  in  our  continuing  dialog.  And 
we  appreciate  and  thank  you  for  your  role  and  for  your  efforts  in 
that  regard. 

We  will  be  submitting  some  written  questions  for  the  record  that 
we  hope  you  will  consider  and  respond  to,  and  we  will  make  that 
availability  open  to  other  members  of  the  subcommittee  and  be  for- 
warding those  to  you.  The  subcommittee  will  be  continuing  this 
process  with  our  next  series  of  hearings  next  Wednesday. 

So  with  that  and  the  appreciation  of  the  members  and  the  staff 
of  the  subcommittee,  thank  you  again.  The  hearing  is  adjourned. 

Mr.  Gleiman.  Mr.  Chairman. 

Mr.  McHuGH.  Mr.  Gleiman. 

Mr.  Gleiman.  If  I  may,  I  want  you  to  know  that  I  think  I  can 
speak  not  only  for  the  Rate  Commission,  but  for  a  good  part  of — 
if  not  all  of— the  postal  community  to  let  you  know  that  it  is  reas- 
suring to  know  that  you  are  taking  the  time  and  making  the  effort 
to  look  at  what  is  a  very  important  entity  to  all  of  us. 

And  as  far  as  your  dream  goes,  knowing  how  your  schedule  is, 
Fm  afraid  it's  going  to  be  a  recurring  dream  over  the  years.  I  hope 
that  you  can  get  more  Members  out.  But  thank  you  for  giving  us 
the  opportunity  today. 

Mr.  McHuGH.  Thank  you  all  very  much. 

rWhereupon,  at  12:05  p.m.,  the  subcommittee  was  adjourned, 
subject  to  the  call  of  the  Chair.] 

[Additional  information  submitted  for  the  hearing  record  follows:] 


Prepared  Statement  of  Hon.  Cardiss  Collins,  a  Representative  in  Congress 
From  the  State  of  Illinois 

Mr.  Chairman,  this  is  the  second  oversight  hearing  on  the  postal  service.  I  am 
pleased  to  join  my  colleagues  in  welcoming  the  Postal  Rate  Commission  and  look 
forward  to  your  testimony. 

In  testimony  before  this  subcommitttii  last  week.  Postmaster  General  Runyon  ex- 
pressed an  interest  in  deregulation  of  the  1970  Postal  Reorganization  Act  and  com- 
mercialization of  the  postal  service. 

He  wants  to  simplify  and  shorten  the  rate  making  process  and  be  able  to  offer 
volume  discounts  to  business  mailers  and  in  general  move  qviickly  to  bring  new 
products  to  the  marketplace. 

Since  the  commission  monitors  postal  finances  and  mail  volume,  I  am  interested 
in  hearing  reactions  from  the  chairman  and  commissioners  on  Mr.  Runyon's  request 
for  flexibility  in  the  ratemaking  process  and  on  deregulation  of  the  1970  postal  reor- 
ganization set. 

I  am  also  interested  in  your  views  on  the  ability  of  the  Postal  Service  to  remain 
competitive  in  the  face  of  questionable  finances.  GAO  testified  last  week  that  de- 
spite billions  spent  on  new  faciUties  and  new  automation,  postal  costs  are  still  not 
under  control. 

I  look  forward  to  your  thoughts  on  these  pressing  matters.  Thank  you. 



WEDNESDAY,  MARCH  8,  1995 

U.S.  House  of  Representatives, 
Subcommittee  on  the  Postal  Service, 
Committee  on  Government  Reform  and  Oversight, 

Washington,  DC. 

The  subcommittee  met,  pursuant  to  notice,  at  10:05  a.m.,  in  room 
2247,  Raybum  House  Office  Building,  Hon.  John  M.  McHugh 
(chairman  of  the  subcommittee)  presiding. 

Present:  Representatives  McHugh,  Sanford,  Oilman,  Ehrlich, 
Green,  and  CoUins  of  IlUnois. 

Staff  present:  Dan  Blair,  staff  director;  Jane  Hatcherson,  Robert 
Taub,  Heea  Vazirani-Fales,  and  Steve  Williams,  professional  staff 
members;  Meryl  Cooper,  clerk;  and  Denise  Wilson,  minority  profes- 
sional staff. 

Mr.  McHugh.  I  would  like  to  call  this  meeting  of  the  subcommit- 
tee to  order. 

As  a  preface  to  my  opening  statement,  I  want  to  comment,  as  we 
have  grappled  with  in  prior  sessions,  as  is  happening  throughout 
this  Capitol,  on  both  sides  of  the  Congress,  Members  are  greatly 
stressed  with  any  number  of  meetings,  and  I  am  sure  people  will 
be  drifting  in  and  out  today.  I  want  to  assure,  particularly,  our 
honored  guests  here  this  morning,  it  in  no  way  reflects  anything 
but  the  highest  opinion  of  your  presence  here  today.  We  beg  your 
understanding  and  appreciate  that  as  well. 

Today  I  am  pleased  to  welcome  the  Postal  Service's  Board  of 
Governors  before  this  subcommittee.  At  the  outset,  I  want  to  ex- 
tend my  best  wishes  and  greetings  to  Chairman  Sam  Winters  and 
the  other  Governors  present  with  us  today.  We  appreciate  your  ap- 

For  the  record,  I  would  like  to  have  inserted  a  letter  from  Vice 
Chairman  Tirso  Del  Junco  stating  his  absence  from  today's  hearing 
due  to  a  previously  scheduled  meeting. 

[The  letter  from  Tirso  Del  Junco  follows:] 

Board  of  Governors, 

Washington,  DC, 
February  15,  1995. 
Honorable  John  McHugh,  Chairman, 
House  Government  Reform  and  Oversight, 
Subcommittee  on  the  Postal  Service, 
U.S.  House  of  Representatives, 
Washington,  DC  20515-3224. 

Dear  Mr.  Chairman:  It  was  a  pleasure  to  meet  with  you  last  week  and  have  our 
initial  discussions  on  the  Postal  Service.  I  have  confidence  that  this  new  Congress 



will  reach  objective  decisions  on  those  matters  which  may  impact  on  the  Postal 
Service's  goals  of  providing  consistent,  timely  mail  service  while  also  holding  mail 
rates  for  all  of  our  customers  to  the  lowest  responsible  level. 

While  I  will  attend  the  regularly  scheduled  meeting  of  the  Board  of  Governors  on 
March  6-7,  I  will,  unfortunately,  not  be  able  to  appear  at  your  scheduled  oversight 
hearing  for  the  Governors  on  March  8.  I  will  be  out  of  the  country  for  a  meeting 
of  another  board  that  had  previously  scheduled  its  meeting  on  March  8. 
Thank  you  again  for  the  meeting  last  week. 


Vice  Chairman. 

Mr.  McHuGH.  As  the  board  of  directors  for  what  would  be  one 
of  the  Nation's  largest  corporations,  the  Board  of  Governors  serves 
a  pivotal  role  as  the  sole  source  for  political  accountability  in  the 
operation  of  the  U.S.  Postal  Service. 

History  shows  that  some  past  boards  have  taken  this  role  as  a 
mandate  to  micromanage  the  day-to-day  operations  of  the  Service; 
others  have,  sadly,  failed  to  perform  their  fiduciary  duty  in  per- 
forming legitimate  oversight  functions.  I  look  forward  to  today's 
testimony  and  to  Chairman  Winters  helping  the  subcommittee  to 
better  understand  this  current  board's  role  and  view  of  the  sub- 
stantial oversight  duties  placed  upon  them  by  the  Congress. 

The  subcommittee  is  also  most  interested  in  having  the  Gov- 
ernors describe  their  views  on  the  current  state  of  postal  finances. 
Last  year  some  criticized  the  Postal  Service  for  failing  to  request 
a  timely  rate  increase.  New  rates  took  effect  this  past  January.  The 
subcommittee  is  interested  in  hearing  the  Grovemors'  views  on  the 
adequacy  of  the  revenue  expected  to  be  generated  and  the  in- 
crease's effect  on  long-term  postal  finances. 

As  I  am  sure  you  are  aware,  some  in  Congress  have  targeted  the 
Postal  Service  as  a  source  of  deficit  reduction,  by  way  of  requiring 
it  to  prefund  its  retirees'  health  benefits.  And  there,  too,  we  would 
appreciate  hearing  the  Governors'  view  on  this  proposal  and  the  ef- 
fect that  such  an  action  would  have  on  both  short-term  and  long- 
term  postal  finances. 

On  Tuesday,  February  18,  the  Postmaster  (General  and  the  Gen- 
eral Accounting  Office  appeared  before  the  House  Appropriations 
Treasury  and  Postal  Subcommittee  to  discuss  the  continuing  serv- 
ice and  delivery  problems  experienced  by  businesses  and  residents 
of  Washington,  DC,  and  the  metropolitan  area.  Of  concern  to  me 
was  GAO's  findings  that  attributed  the  source  of  such  problems  to 
long-standing  labor-management  disputes  which  adversely  affect 
employee  morale  and  contribute  to  higher  than  average  substance 
abuse  problems  and  utilization  of  sick  leave. 

I  am  sure  the  Governors  share  my  concern,  and  the  other  mem- 
bers of  the  subcommittee,  that  these  problems,  not  only  evident 
here  in  Washington  but  a  problem  nationwide,  to  a  certain  degree, 
as  well,  need  to  be  addressed.  The  subcommittee  looks  forward  to 
Chairman  Winters'  testimony  in  this  regard  and  any  proposals  to 
help  solve  these  long-standing  problems. 

In  the  past,  some  legislators  have  expressed  concern  that  the 
Governors  have  not  been  fully  apprised  of  postal  operations  and 
problems,  and  the  quality  of  information  provided  the  Governors  by 
postal  management  has  at  times  been  less  than  adequate.  This 
subcommittee's  members  are  interested  in  hearing  the  Governors' 
view  on  these  claims  and  whether  we  can  facilitate  and  improve 


the  exchange  of  information  between  the  Governors  and  postal 

I  raise  this  issue  because  of  the  tremendous  responsibilities  cur- 
rent postal  statutory  structure  places  on  the  Governors,  who  oper- 
ate with  only  one  formal  staffer. 

As  you  know,  both  the  Postmaster  General  and  the  Postal  Rate 
Commission  preceded  you  ladies  and  gentlemen  before  this  sub- 
committee as  witnesses.  I  want  to  restate  an  observation  that  I 
made  during  those  earlier  sessions,  that  simply  these  are  extraor- 
dinary times  of  change  for  both  the  Postal  Service  and  the  Federal 
Government  at  large. 

This  subcommittee  has  both  a  duty  and  an  obligation  to  the  citi- 
zens of  this  Nation  to  work  with  all  interested  parties  in  pursuing 
and  implementing  those  policies  that  will  provide  the  citizens  of 
this  Nation  and  the  patrons  of  the  Postal  Service  with  the  most  ef- 
ficient and  productive  system  possible. 

With  that,  again,  I  want  to  thank  the  Governors  for  their  appear- 
ance here  today,  and  I  certainly  look  forward  to  their  testimony. 

I  take  this  opportunity  to  5deld  to  the  vice  chairman  of  the  sub- 
committee, the  Honorable  Mark  Sanford. 

Mr.  Sanford.  Thank  you.  I  have  no  opening  statement. 

Mr.  McHuGH.  No  opening  statement.  I  thank  the  gentleman. 

Joining  us  from  the  minority  side,  the  gentleman  from  Texas, 
Mr.  Green. 

Mr.  Green.  Mr.  Chairman,  I  have  an  opening  statement  I  would 
like  to  place  in  the  record,  but  I  couldn't  pass  without  welcoming 
the  chauman,  Mr.  Winters.  For  the  record,  Mr.  Winters  and  I  have 
had  this  relationship  for  many  years.  Twenty-two  years  ago  I 
served  my  first  term  in  the  Texas  House,  and  Sam  Winters  was  a 
friend  and  testified  before  our  House  Insurance  Committee  many 
times.  I  welcome  him  back.  Both  of  us  are  wearing  different  hats 

Mr.  Winters.  But  you're  always  up  there,  and  I'm  always  down 

Mr.  Green.  That's  the  way  it's  supposed  to  be,  Sam.  [Laughter.] 

Mr.  McHuGH.  The  gentleman  from  Texas'  comments  are  so 
noted.  Without  objection,  his  written  opening  statement  will  be 
placed  in  the  record. 

[The  prepared  statement  of  Hon.  Gene  Green  follows:] 

Prepared  Statebjent  of  Hon.  Gene  Green,  a  Representative  in  Congress 
From  the  State  of  Texas 

Thank  you,  Mr.  Chairman.  With  the  goal  of  making  the  U.S.  Postal  Service  more 
efficient,  less  costly,  and  more  service-oriented,  we  continue  our  series  of  oversight 
hearings  on  postal  operations.  The  Postal  Service's  Board  of  Governors  plays  a  sig- 
nificant role  in  this  process  by  providing  guidance  emd  establishing  the  overall  direc- 
tion in  which  the  Post  Office  moves. 

Postmaster  General  Marvin  Runyon  has  come  under  criticism  from  many  quarters 
for  his  inability  to  control  posted  costs  and  improve  service,  despite  investments  in 
automation.  The  Board  of  Governors  has  signalled  its  displeasiu*e  of  his  performance 
by  establishing  a  panel  to  consider  and  make  recommendations  on  salaries,  incen- 
tive plans,  and  other  compensation  of  senior  postal  officials.  By  restricting  the  Post- 
master General's  authority  in  this  area,  the  Board  intended  to  send  a  signal.  I  am 
very  interested  in  learning  today  about  the  Board's  motivation  for  this  action  and 
their  plans  for  the  Postal  Service  in  the  future. 


Mr.  McHuGH.  Two  ground  rules:  The  first  is,  to  the  Members — 
and  this  has  not  been  necessary,  but  in  case  there  is  a  problem — 
we  try  to  adhere  to  the  5 -minute  rule,  although  we  do  not  have  a 
formal  clock,  and  rotate  through  the  Members  as  often  and  as 
many  times  as  possible.  We  appreciate  Members'  understanding 
and  working  within  those  guidelines. 

The  second  is  a  standing  rule  of  the  full  Committee  on  Govern- 
ment Reform  and  Oversight,  whereby  all  witnesses  will  be  sworn 
in  formally.  This  is  not  a  reflection  on  the  caliber  of  the  present 
witnesses  here  this  morning,  I  assure  you.  But  if  the  ladies  and 
gentlemen  would  rise,  I  will  administer  the  oath. 

[Witnesses  sworn.] 

Mr.  McHuGH.  With  the  formalities  and  swearing  in  aside,  it  is 
now  my  honor  to  yield  the  floor  to  the  chairman  of  the  Governors, 
Mr.  Winters,  for  any  opening  comments  he  may  choose  to  make. 


Mr.  Winters.  Thank  you  very  much,  sir. 

I  am  Sam  Winters  from  Austin,  TX,  and  I  am  chairman  of  the 
Board  of  Governors,  U.S.  Postal  Service.  Sitting  here  with  me  today 
are  all  of  the  existing  Governors,  except  Governor  Del  Junco,  that 
you  mentioned,  who  could  not  be  with  us  today. 

We  have  Governor  LeGree  Daniels,  from  Harrisburg,  PA;  Norma 
Pace,  from  North  Palm  Beach,  and  formerly  of  New  York  City; 
Susan  Alvarado,  from  Alexandria,  VA;  Governor  Einar  Dyhrkopp  of 
Shawneetown,  IL;  and  Governor  Bert  Mackie  of  Enid,  OK.  We  are 
sorry  that  Governor  Del  Junco  couldn't  be  here  today.  He  is  our 
vice  chairman. 

As  you  have  indicated,  Mr.  Chairman,  I  have  provided  a  com- 
plete copy  of  my  statement  to  the  committee  for  the  record,  and 
this  morning  I  would  like  to  just  offer  the  highlights  from  it. 

Each  Governor  of  the  Postal  Service  is  nominated  by  the  Presi- 
dent of  the  United  States  and  is  confirmed  by  the  Senate  for  a  9- 
year  term.  Bipartisanship  on  the  board  is  assured  by  the  limitation 
that  no  more  than  five  members  of  one  political  party  may  serve 
among  the  nine  Governors. 

All  of  the  Governors  appreciate  the  opportunity  to  appear  here 
today  and  talk  with  you  about  our  stewardship  of  the  U.S.  Postal 

When  it  comes  down  to  the  fundamental  act  of  delivering  mail 
to  an  American  home  or  business,  our  Postal  Service  is  one  of  the 
most  up-close  and  personal  of  all  of  our  national  institutions.  It  di- 
rectly touches  the  lives  of  every  American  every  day. 

So  like  yours,  our  constituents  keep  us  up  to  date  on  how  they 
think  the  Postal  Service  is  doing.  Most  of  our  constituents  believe 
we're  doing  fine.  Many  believe  we  can  do  better.  As  Grovemors  we 
feel  the  same.  Our  employees  are  doing  a  great  job,  but  we  have 
to  do  even  better  if  we're  going  to  keep  up  with  our  customers' 
needs  in  the  future. 

Each  Grovemor  is  aware  of  the  responsibilities  of  public  service. 
I  think  that  we  have  each  come  to  our  places  and  our  posts  as  ac- 
complished people  in  our  chosen  fields  who  want  to  serve  their 
country  in  some  way.  By  law,  we  serve  as  the  American  people's 


representatives  in  the  process  of  guiding  and  managing  this  busi- 
nesslike public  service. 

The  statute  provides  that  we  represent  the  public  generally  and 
that  we  should  not  be  representatives  of  specific  interests  using  the 
Postal  Service.  We  function  with  many,  but  not  all,  of  the  dis- 
ciplines of  a  corporate  board  of  directors. 

A  Governor's  compensation  is  modest.  It  is  embedded  in  the  stat- 
ute and  has  not  been  increased  in  25  years.  Each  Governor  puts 
aside  many  hours  of  time  each  month  to  remain  current  on  the  af- 
fairs of  the  Postal  Service.  This  includes  work  associated  with  the 
board's  three  committees — for  audit,  compensation,  and  strategic 
planning.  It  includes  visiting  postal  facilities  and  mailer  plants  to 
observe  operations  firsthand,  and  it  includes  preparing  for  board 
meetings  as  well  as  studying  materials  pertaining  to  all  aspects  of 
operating  the  Postal  Service. 

The  board  has  regular  meetings  in  Washington,  DC,  or  in  an 
area  of  the  country  that  allows  us  to  see  new  technologies  or  sys- 
tems that  are  being  implemented  by  the  Postal  Service,  mailers,  or 
even  our  competitors.  We  usually  meet  on  the  first  Monday  and 
Tuesday  of  each  month,  but  there  can  also  be  special  meetings. 

We  appoint  the  Postmaster  General  and,  with  the  Postmaster 
General,  appoint  the  Deputy  Postmaster  General.  By  statute,  the 
board  directs  the  overall  policy  of  the  Postal  Service.  It  approves 
all  major  capital  expenditures  of  $10  million  or  more,  reviews  man- 
agement actions  of  significance;  and  reserves  the  approval  of  officer 
compensation.  The  Governors  ultimately  determine  the  amount  of 
mail  rate  increases  after  the  full  board  has  determined  that  such 
is  necessary.  And  the  board  determines  when  and  if  a  mail  classi- 
fication case  should  be  filed  with  the  Rate  Commission. 

I  believe  that  in  conducting  all  of  our  board  activities,  we  are 
quite  faithful  in  following  the  mandates  of  the  Postal  Reorganiza- 
tion Act  that  the  Congress  passed  some  25  years  ago.  The  act  con- 
veys a  specific  obligation  to  the  Postal  Service: 

To  provide  postal  services,  to  bind  the  Nation  together  through  personal,  edu- 
cational, literary,  and  business  correspondence  of  the  people.  It  shall  provide 
prompt,  reliable,  and  efficient  services  to  customers  in  all  areas  and  shall  render 
postal  services  to  all  communities. 

We  are  meeting  this  obligation.  In  the  most  recent  quarter,  84 
percent  of  the  local,  first-class  mail  was  delivered  on  time — prompt- 
ly and  reliably — against  our  self-imposed  time  limits.  Our  automa- 
tion program  is  working.  I  know  that  the  GAO  has  recently  re- 
ported that  we're  not  achieving  planned  savings  and  that  the  pro- 
gram was  slowed  somewhat  while  management  and  the  board  took 
a  careful  look  at  the  whole  program. 

A  review  of  our  automation  investments  was  prudent.  We  are 
saving  money,  about  $5  billion  to  date  and  $14  billion  in  the  longer 
run,  as  a  result  of  the  revised  program.  If  we  didn't  have  the  ma- 
chines we  do,  our  costs  would  be  higher  today. 

Automation  has  been  a  sound  business  investment.  This  is  clear- 
ly in  keeping  with  the  mandates  of  our  customers  who  tell  us  that 
they  want  the  Postal  Service  to  operate  more  like  a  business.  Oper- 
ating like  a  business,  however,  is  very  difficult  to  do  under  the 
many  constraints  written  into  the  act  and  other  laws  that  affect  us. 


For  example,  we  handle  about  $300  million  in  cash  a  day,  but 
our  ability  to  get  a  maximum  return  on  that  cash  is  limited  by  the 
Treasury  Department.  Our  banking  and  borrowing  authority  are 
also  subject  to  Treasury  controls.  The  Labor  Department  sets  rules 
on  workers'  compensation.  The  Transportation  Department  regu- 
lates what  we  pay  for  international  air  service. 

The  Office  of  Personnel  Management  oversees  and  enforces  per- 
sonnel rules.  The  Merit  Systems  Protection  Board,  MSPB,  adds  an. 
additional  layer  of  appeals  to  the  already  cumbersome  process. 
These  latter  two  entities,  OPM  and  MSPB  don't  always  agree. 

There  are  additional  barriers  to  being  businesslike.  We  are  man- 
dated to  prepare  a  business  type  budget  that  projects  current  and 
future  year  performance.  This  serves,  essentially,  as  our  operating 
plan.  It  is  virtually  impossible  to  make  that  plan  when  the  Con- 
gress does  not  meet  its  obligation  to  fully  fund  subsidies  to  mailers 
that  it  has  mandated  and  that  we  included  in  our  original  plain. 
This  has  happened  in  the  past. 

Also,  25  years  ago,  at  the  time  of  postal  reorganization.  Congress 
and  the  administration  enacted  a  firewall  between  the  Postal  Serv- 
ice and  the  old  Post  Office  Department.  The  Postal  Service  was  to 
start  fresh  and  eventually  become  self-sufficient.  It  was  established 
at  that  time  that  all  liabilities  of  the  Post  Office  Depzirtment  be- 
came liabilities  of  the  Federal  Gk)vemment. 

However,  in  the  mid-1980's,  the  Congress  and  the  administra- 
tion imposed  some  of  these  obligations  on  the  Postal  Service  to  sup- 
port Federal  deficit  reductions.  By  1998,  various  Omnibus  Budget 
Reconciliation  Acts,  OBRA's,  will  have  taken  $14  billion  from  us. 
It  is  ironic,  Mr.  Chairman,  that  in  1983,  ahead  of  schedule,  the 
Postal  Service  weaned  itself  from  subsidies  from  the  Treasury  only 
to  see  the  process  reversed,  to  the  detriment  of  our  ratepayers.  The 
proposed  prefunding  of  retiree  health  benefits  in  the  amount  of 
$11.6  billion  would  hurt  our  ratepayers  even  more. 

Another  restraint  on  our  ability  to  be  competitive  is  the  current 
state  of  collective  bargaining  in  the  Postal  Service.  This  is  an  im- 
portant issue,  because  salaries  and  benefits  represent  about  80 
cents  of  every  $1  we  spend.  Yet  largely  because  of  the  economic  is- 
sues, we  are  headed  today  for  the  fourth  binding  arbitration  over 
the  course  of  the  last  six  negotiations  with  our  largest  unions. 
Something  is  broken  here. 

Because  of  that  arbitration,  I  will  be  gnaarded  in  my  comments 
here  today,  but  I  will  say  that  we  need  pay  for  performance  in  the 
Postal  Service.  Our  ability  to  compete  requires  cost  constraints.  To 
attract  new  business  and  even  to  hold  onto  existing  business,  we 
must  have  labor  costs  that  are  fair  to  our  customers. 

We  also  need  the  Postal  Rate  Commission  to  do  its  part  to  keep 
postal  services  competitive.  The  Postal  Service  is  soon  to  file  a  re- 
classification case  as  a  first  step  toward  market-based  pricing  re- 
form. It  will  give  the  Postal  Rate  Commission  a  fresh  opportunity 
to  recognize  the  value  of  automation  and  the  marketplace  pres- 
sures we  are  experiencing.  In  short,  the  Rate  Commission  has  a 
genuine  opportunity  here  to  help  the  Postal  Service  adopt  a  busi- 
ness strategy  that  points  to  future  growth. 

Pricing  mail  at  market  prices  meets  the  reality  of  competition. 
The  present  system  does  not.  It  is  too  time-consuming.  It  is  too  con- 


straining  in  the  face  of  competition.  It  is  too  costly;  it  simply  isn't 
representing  the  interests  of  our  customers. 

Now,  we  recognize  that  there  are  some  who  say  that  if  the  Postal 
Service  wants  to  compete,  just  privatize  it,  sell  it  off,  or  open  it  up 
to  competition  to  anyone  who  wants  to  deliver  the  mail.  That  won't 
work.  We  don't  need  a  cream-skimming  free-for-all  that  erodes  uni- 
versal service. 

Universal  service  is  important  to  our  Nation's  economic  health. 
And  the  law  is  clear  on  that.  The  Congress  and  the  administration 
intended  that  we  should  provide  "a  maximum  degree  of  effective 
and  regular  postal  services  to  rural  areas,  communities,  and  small 
towns  where  post  offices  are  not  self-sustaining."  We  need  to  stay 
faithful  to  this  principle  and  to  work  to  strengthen,  not  dismember, 
our  postal  system. 

We  need  more  "commercialization"  to  make  the  Postal  Service 
more  competitive.  It  is  time  to  operate  the  Postal  Service  as  it  was 
intended  to  be  operated:  as  a  modern  government  enterprise  in  con- 
trol of  the  complexities  of  public  service  delivered  in  a  businesslike 

The  Governors  are  committed  to  working  with  the  Congress,  the 
administration,  and  the  other  stakeholders  in  the  Postal  Service  to 
do  whatever  it  takes  to  meet  the  mandate  that  our  friends  and 
neighbors  and  business  acquaintances  gave  us,  which  is  to  "just 
run  the  place  like  a  business." 

Thank  you,  Mr.  Chairman.  That  concludes  my  statement. 

[The  prepared  statement  of  Mr.  Winters  follows:] 

Prepared  Statement  of  Sam  Winters,  Chairman,  Board  of  Governors,  U.S. 

Postal  Service 

introduction  of  the  governors 

Thank  you,  Mr.  Chairman.  I  am  Sam  Winters,  Chairman  of  the  Board  of  Gov- 
ernors. I  am  from  Austin,  Texas.  With  me  today  are  the  following  Governors: 

Governor  Norma  Pace  Uves  in  North  Palm  Beach,  Florida,  and  formerly  lived  in 
New  York  City. 

Governor  Susan  Alvarado  is  from  Alexandria,  Virginia. 

Governor  Bert  Mackie  is  from  Enid,  Oklahoma. 

Governor  LeGree  Daniels  lives  in  Harrisburg,  Pennsylvania. 

Governor  Einar  Dyhrkopp  is  from  Shawneetown,  IlUnois. 

Governor  Tirso  del  Junco,  who  lives  in  Los  Angeles,  Cahfomia,  and  who  is  the 
Vice  Chairman  of  the  Board,  could  not  be  with  us  today. 

Four  of  the  Governors  are  RepubUcans,  and  three  are  Democrats.  However,  party 
afiiliation  is  not  recognizable  when  it  comes  to  exercising  our  duties.  We  share  a 
common  interest  in  the  success  of  the  Posta^  Service. 

President  Clinton  has  nominated  Philadelphia  attorney  David  Fineman  to  the 
Board.  If  confirmed  by  the  Senate,  he  will  assume  the  seat  of  Governor  Pace,  whose 
term  expired  last  December.  There  currently  are  two  other  vacancies  on  the  Board. 

Each  Governor  is  nominated  by  the  President  of  the  United  States  and  is  con- 
firmed by  the  Senate.  Our  terms  of  office  are  for  nine  years  and  are  staggered.  A 
Governor  serves  up  to  one  additional  year  after  the  expiration  of  his  or  her  term 
or  until  a  successor  is  confirmed.  Bipartisanship  on  the  Board  is  assured  by  the  lim- 
itation that  no  more  than  five  members  of  one  political  party  can  serve  among  the 
nine  Governors. 


All  of  the  Governors  appreciate  the  opportunity  to  appear  today  and  to  talk  with 
you  about  our  stewardship  of  the  United  States  Postal  Service.  We  have  found  that 
the  Postal  Service  is  one  of  the  most  complex  of  all  our  nation's  enterprises,  with 
a  budget  of  $54  billion  and  more  than  800,000  employees.  Perhaps  the  Subcommit- 
tee has  already  discovered  that  complexity,  too. 


When  it  comes  down  to  the  fundamental  act  of  deUvering  mail  to  an  American 
home  or  business,  our  Postal  Service  is  one  of  the  most  close  and  personal  of  all 
of  our  national  institutions.  It  directly  touches  the  lives  of  every  American  every 
day.  So,  like  yours,  our  constituents  keep  us  up  to  date  on  how  they  think  the  Postal 
Service  is  doing. 

Most  of  our  constituents  believe  we  are  doing  fine;  many  believe  we  can  do  better. 
As  Governors,  we  feel  the  same  way — the  employees  are  doing  a  great  job,  but  we 
have  to  do  even  better  to  keep  up  with  our  customers'  needs  in  the  future. 

Most  Americans  use  the  mail  as  a  fundamental  part  of  their  communications,  bill 
pa5dng,  and  shopping.  So,  their  expectations  for  prompt,  courteous,  and  reliable 
service  are  high.  Mr.  Chairman,  the  Governors'  expectations  are  just  as  high. 

Each  of  us  uses  and  depends  on  the  Postal  Service  in  our  own  business  and  per- 
sonal correspondence  in  the  same  ways  all  U.S.  citizens  do.  And,  we  do  not  take 
lightly  the  responsibility  of  sitting  as  the  policy  board  of  a  $54  billion  enterprise. 

Each  Governor  is  aware  of  the  responsibilities  of  public  service.  I  believe  that  we 
have  come  to  our  posts  as  accompUshed  people  in  our  chosen  fields  who  want  to 
serve  our  country  in  some  way.  By  law,  we  serve  as  the  American  people's  rep- 
resentatives in  the  process  of  guiding  and  managing  this  businesslike  public  service. 
The  statute  provides  that  we  represent  the  public  generally  and  that  we  should  not 
be  representatives  of  specific  interests  using  the  Postal  Service. 

We  function  with  many — but  not  all — of  the  disciplines  of  a  corporate  board  of  di- 
rectors. A  Governor's  compensation  is  modest.  It  is  imbedded  in  the  statute  and  has 
not  been  increased  in  25  years. 

Each  Governor  puts  aside  many  hours  of  time  each  month  to  remain  current  on 
the  affairs  of  the  Postal  Service.  This  includes  work  associated  with  the  Board's 
three  committees — for  audit,  for  compensation,  and  for  strategic  planning.  It  in- 
cludes visiting  postal  and  mailer  plants  to  observe  operations  first  hand. 

And,  it  includes  preparing  for  Board  meetings,  as  well  as  studying  material  per- 
taining to  all  aspects  of  operating  the  Postal  Service.  The  Board  has  regular  meet- 
ings in  Washington,  D.C.,  or  in  an  area  of  the  country  that  allows  us  to  review  an 
area's  operations  and  see  new  technologies  or  systems  that  are  being  implemented 
by  the  Postal  Service,  mailers,  and  even  our  competitors.  We  usually  meet  on  the 
first  Monday  and  Tuesday  of  each  month.  If  a  Governor  does  not  live  within  com- 
muting distance  of  a  meeting,  we  travel  on  Sunday.  There  may  also  be  special  meet- 

In  the  exercise  of  our  statutory  duties,  we  appoint  the  other  two  members  of  the 
Board,  including  the  Postmaster  General — who  becomes  the  Chief  Executive  Officer 
and  who  serves  at  our  pleasure.  With  the  Postmaster  General,  we  also  appoint  the 
Deputy  Postmaster  General. 

By  statute,  the  Board  directs  the  overall  policy  of  the  Postal  Service.  It  approves 
all  major  capital  expenditures  of  $10  million  or  more,  reviews  all  management  ac- 
tions of  significance,  and  reserves  the  approval  of  officer  compensation.  The  nine 
Governors  ultimately  determine  the  amount  of  mail  rate  increases,  after  the  full 
Board  has  determined  that  they  are  necessary.  And,  the  Board  determines  when 
and  if  a  mail  reclassification  case  should  be  filed  with  the  Rate  Commission. 

When  we  last  raised  rates  in  January,  it  was  the  first  increase  in  four  years,  and 
the  amount  of  the  increase  in  a  First-Class  stamp  was  about  two  points  below  infla- 
tion for  those  four  years.  This  is  an  accompUshment  we're  proud  of. 


I  believe  that  in  conducting  all  of  our  Board  activities  we  are  quite  faithfully  fol- 
lowing the  mandates  of  the  Postal  Reorganization  Act  that  was  made  law  some  25 
years  ago.  The  Act  conveys  a  specific  obligation  to  the  Postal  Service:  "to  provide 
postal  services  to  bind  the  Nation  together  through  the  personal,  educational,  lit- 
erary, and  business  correspondence  of  the  people.  It  shall  provide  prompt,  reliable 
and  efficient  services  to  patrons  in  all  areas  and  shall  render  postal  services  to  all 

We  are  meeting  this  obligation.  In  the  most  recent  quarter,  84  percent  of  local 
First-Class  Mail  was  delivered  on  time — promptly  and  reliably — against  our  self-im- 
posed time  limits.  Our  efficiency  is  improving,  too.  I  know  that  the  GAO  has  re- 
cently reported  that  we're  not  achieving  planned  savings  from  automation  and  that 
its  deployment  was  slowed  somewhat  while  management  and  the  Board  took  a  care- 
ful look  at  the  whole  program.  Our  review  confirmed  the  value  of  automation,  and 
we  are  going  full  speed  ahead. 

The  review  of  our  automation  investments  was  prudent.  We  are  saving  money — 
about  $5  billion  to  date  and  $14  billion  in  the  longer  term  as  a  result  of  the  revised 
program.  If  we  didn't  have  the  machines  we  do,  our  costs  would  be  higher  today. 


The  economics  are  pretty  simple  here.  Automated  sorting  is  ten  times  faster  than 
manual  sorting  and  about  five  times  faster  than  mechanized  sorting. 

Automation  has  been  a  sound  business  investment.  That  is  clearly  in  keeping 
with  the  mandates  of  our  customers  who  tell  us  that  they  want  the  Postal  Service 
to  operate  more  like  a  business. 

Operating  like  a  business,  however,  is  very  difficult  to  do  under  the  many  con- 
straints written  into  the  Act  and  other  laws  that  affect  us. 

For  example,  we  handle  about  $300  million  in  cash  a  day,  but  our  ability  to  get 
a  maximum  return  on  that  cash  is  limited  by  the  Treasury  Department.  Our  bank- 
ing and  borrowing  authority  also  are  subject  to  Treasury  controls.  The  Labor  De- 
partment sets  rules  on  workers  compensation.  The  Transportation  Department  reg- 
ulates what  we  pay  for  international  air  service.  The  Otttice  of  Personnel  Manage- 
ment oversees  andf  enforces  personnel  rules,  while  the  Merit  Systems  Protection 
Board  adds  an  additional  layer  of  appeals  to  the  already  cumbersome  process.  And, 
these  latter  two  entities  don't  always  agree.  That  was  certainly  proven  last  year 
when  MSPB  ruled  that  the  1992-93  restructuring  was  a  Reduction  m  Force— even 
though  not  one  person  lost  any  pay  or  grade.  This  was  despite  the  fact  that  0PM 
had  intervened  in  the  case,  arguing  that  the  Postal  Service  had  not  conducted  a 

In  the  private  sector,  this  would  have  been  considered  the  most  humane 
downsizing  ever.  The  MSPB  didn't  agree,  saying  that  some  people  lost  "status." 
Worse,  we  weren't  allowed  to  appeal— even  though  0PM  had  agreed  that  MSPB  was 
wrong.  In  the  end,  the  Justice  Department— our  lawyer  because  the  law  won't  let 
us  represent  ourselves — would  not  represent  us  in  covu-t.  Frankly,  if  I  did  that  to 
one  of  my  clients,  they'd  get  another  lawyer.  But  we  can't  do  that. 

There  are  additional  barriers  to  being  businesslike.  We  are  mandated  to  prepare 
a  business-type  budget  that  projects  current  and  future  year  performance.  This 
serves,  essentially,  as  our  operating  plan.  It  is  virtually  impossible  to  make  that 
plan  when  the  Congress  does  not  meet  its  obligations  to  fully  fund  subsidies  to  mail- 
ers that  it  has  mandated  and  that  we  included  in  our  original  plan.  This  has  hap- 
pened in  the  past.  .   . 

Also,  25  years  ago  at  the  time  of  postal  reorganization.  Congress  and  the  Adminis- 
tration erected  a  firewall  between  the  Postal  Service  and  the  old  Post  Office  Depart- 
ment. The  Postal  Service  was  to  start  fresh  and  eventually  become  self-sufficient. 
It  was  estabUshed  at  that  time  that  all  liabihties  of  the  Post  Office  Department  be- 
came Habilities  of  the  federal  government.  However,  in  the  mid-1980s  the  Congress 
and  the  Administration  imposed  some  of  these  obligations  on  the  Postal  Service  to 
support  federal  deficit  reduction.  By  1998,  various  omnibus  budget  reconcihation 
acts  will  have  taken  $14  billion  from  us.  It  is  ironic,  Mr.  Chairman,  that  in  1983— 
ahead  of  schedule— the  Postal  Service  weaned  itself  from  subsidies  from  the  Treas- 
ury only  to  see  the  process  reversed  to  the  detriment  of  our  ratepayers. 

And,  the  proposed  prefunding  of  retiree  health  benefits— in  the  amount  of  $11.6 
biUion  over  five  years — would  hurt  our  ratepayers  more. 

Another  restraint  on  our  ability  to  be  competitive  is  the  current  state  of  collective 
bargaining  in  the  Postal  Service.  This  is  an  important  issue  because  salaries  and 
benefits  represent  80  cents  of  every  dollar  we  spend.  Yet,  largely  because  of  the  eco- 
nomic issues,  we  are  headed  today  for  the  fourth  binding  arbitration  over  the  course 
of  the  last  six  negotiations  with  our  largest  unions.  Something  is  broken  here. 

Because  of  that  arbitration,  I  will  be  guarded  in  my  comments  here  today.  But 
I  will  say  that  we  need  pay  for  performance  in  the  Postal  Service.  Our  ability  to 
compete  requires  cost  constraints.  To  attract  new  business,  and  even  to  hold  onto 
existing  business,  we  must  have  labor  costs  that  are  fair  to  our  customers.  Our 
workers  are  well  paid,  as  they  should  be.  They  enjoy  career  security— as  the  Postal 
Reorganization  Act  envisioned  they  would.  We  need  to  maintain  a  balance  between 
wage  policies  in  the  Postal  Service  and  those  in  the  nation  as  a  whole. 

We  also  need  the  Postal  Rate  Commission  to  do  its  part  to  keep  postal  services 
competitive.  The  Postal  Service's  soon-to-be-filed  reclassification  case  is  a  first  step 
toward  market-based  pricing  reform.  It  will  give  the  Postal  Rate  Commission  a  fresh 
opportunity  to  recognize  the  value  of  automation  and  the  marketplace  pressures 
we're  experiencing.  In  short,  the  Rate  Commission  has  an  opportunity  to  help  the 
Postal  Service  adopt  a  business  strategy  that  points  to  future  growth. 

Pricing  mail  at  market  rates  meets  the  reality  of  competition.  The  present  system 
does  not.  It  is  too  time  consuming.  It  is  too  constraining  in  the  face  of  competition. 
It  is  too  costly.  And,  it  simply  isn't  representing  the  interests  of  our  customers. 

Why?  Well,  it  hasn't  allowed  us  to  offer  discounts  to  encourage  high-volume  mail- 
ers the  way  our  competitors  can.  In  addition,  we  just  went  through  the  equivalent 
of  a  10-month  "trial"  to  prove  that  we  should  raise  our  rates  by  10.3  percent  across 
the  board.  What  was  finally  recommended  by  the  Postal  Rate  Commission,  of 


course,  wasn't  10.3  percent  across  the  board.  Among  the  witnesses  were  some  of  our 
competitors.  One  of  them,  for  example,  has  85  percent  of  a  segment  of  the  market 
where  we  have  about  5  percent.  And  they  can  adjust  their  rates  at  will. 

On  a  level  playing  field,  we  believe  we  can  compete.  We  need  to  level  that  field. 

Now,  we  recognize  that  there  are  some  who  say  that  if  the  Postal  Service  wants 
to  compete,  iust  privatize  it — sell  it  off,  or  open  it  up  to  competition  to  anyone  who 
wants  to  deliver  the  mail.  That  won't  work.  We  dont  need  a  cream-skimming  free- 
for-all  that  erodes  universal  service. 

Universal  service  is  important  to  our  nation's  economic  health.  And  the  law  is 
clear  on  that — the  Congress  and  Administration  intended  that  we  should  provide  "a 
maximum  degree  of  effective  and  regular  postal  services  to  rural  areas,  commu- 
nities, and  small  towns  where  post  offices  are  not  self-sustaining." 

We  need  to  strengthen — not  dismember — our  postal  system. 

And,  we  need  more  "commercialization"  to  make  the  Postal  Service  more  competi- 
tive. It  is  time  to  operate  the  Postal  Service  as  it  was  intended  to  be  operated — 
as  a  modem  government  enterprise,  in  control  of  the  complexities  of  public  service 
delivered  in  a  businesslike  manner.  The  Governors  are  committed  to  working  with 
the  Conqress  and  the  Administration  and  with  the  other  stakeholders  in  the  Postal 
Service  to  do  whatever  it  takes  to  meet  the  mandate  that  our  friends,  and  neigh- 
bors, and  business  acquaintances  gave  us — which  is,  to  "just  run  the  place  like  a 
business."  Thank  you,  Mr.  Chairman.  That  concludes  my  statement. 

Response  to  Written  Question  Submitted  by  Hon.  John  J.  McHugh  to  the 

Board  of  Governors 

Question  1.  Chairman  Winters  stated  in  his  testimony  that  the  automation  pro- 
gram has  saved  the  Postal  Service  about  $5  billion  to  date  and  $14  billion  in  the 
longer  term.  Few  would  argue  against  the  benefits  of  automation  when  compared 
to  manual  methods  of  sorting  mail.  However,  the  U.S.  General  Accounting  Offce 
found  that  because  of  the  Service's  inability  to  control  the  work  force,  automation 
is  producing  far  less  than  expected  and  is  taking  longer  to  implement  than  the  Serv- 
ice anticipated.  Therefore,  please  provide  to  the  Subcommittee  a  detailed  accounting 
of  the  $5  billion  and  $14  billion  savings  from  automation. 

Answer.  While  we  agree  with  the  U.S.  General  Accounting  Office  that  the  chal- 
lenges we  face  are  difficult  and  numerous,  we  are  on  target  to  achieve  the  savings/ 
cost  avoidances  which  were  projected  in  the  justification  and  Decision  Analysis  Re- 
ports (DARs)  for  the  automation  equipment  approved  by  the  Board  of  Governors. 
Through  FY  1994,  this  target  was  approximately  $3  bilhon.  We  estimate  that  we 
have  saved/avoided  $5  billion  in  direct  distribution  labor  operations.  Expanding  the 
analysis  to  include  non-direct  labor,  a  conservative  estimate  is  $2.5  billion.  This  sav- 
ings/cost avoidance  was  accomplished  while  simultaneously  holding  our  rates  steady 
for  four  years — the  longest  period  in  our  history — and  then  proceeding  with  a  rate 
filing  below  the  average  rate  of  inflation  for  the  period.  The  automation  program 
was  a  factor  in  that  achievement.  A  detailed  explanation  of  the  $5  billion  and  the 
$14  billion  savings/cost  avoidance  from  the  automation  program  is  provided  as  at- 
tachment I. 

First,  however,  we  would  like  to  point  out  that  there  is  a  difference  in  the  respec- 
tive views  of  GAO  and  the  Postal  Service  concerning  the  success  of  the  automation 
program.  The  difference  involves  four  issues: 

•  The  Corporate  Automation  Plan  (CAP)  is  a  guideline,  not  a  financial  document. 
GAO  measures  our  performance  against  the  CAP.  However,  measurement  of  the 
progress  made  in  reaching  our  automation  goals  should  be  against  the  specific  objec- 
tives and  projections  stated  in  the  several  Decision  Analysis  Reports  (DARs) 
through  which  the  Board  of  Governors  approved  funding  for  the  automation  pro- 
gram. These  DARs  are  the  corporate  financial  plan  for  automation.  The  CAP,  on  the 
other  hand,  was,  and  remains,  a  statement  of  our  strategy  to  reach  those  goals,  an 
informational  and  communications  tool  to  elicit  the  coordinated  efforts  of  all  func- 
tional areas  of  the  Postal  Service  toward  a  common  end. 

•  The  automation  program  is  a  long-term  effort.  To  make  a  good  assessment  of 
progress,  one  needs  to  look  back  to  the  beginning — where  we  were  when  we  started 
the  program.  Most  of  the  comparisons  in  the  GAO  report  look  back  no  further  than 
1992,  several  years  after  the  program  had  begun.  As  with  any  long-term  cost  avoid- 
ance strategy,  as  the  program  savings  are  realized,  they  become  part  of  the  baseline 
operation  and  will  not  show  up  as  new  savings  again  each  year.  In  order  to  under- 
stand what  has  been  accomplished,  one  has  to  go  back  to  the  beginning  and  model 
what  would  have  happened  vkithout  the  change,  then  compare  that  to  what  actually 
did  happen. 


•  The  automation  program  is  dynamic,  changing  with  events  and  technology.  It 
was  surprising  to  see  that  the  GAO  report  made  much  of  the  fact  that  certain  as- 
sumptions in  our  planning  of  five  or  six  years  ago  did  not  hold  true.  Our  planning 
is  careful,  but  we  cannot  foretell  the  future.  We  could  not  have  predicted  in  1989 
that  our  Remote  Bar  Coding  System  would  become  so  contentious  that  it  would  be 
held  up  for  almost  two  years.  Nor  could  we  have  avoided  the  Hempstead  Arbitration 
with  our  carrier  union  and  its  impact  on  our  city  delivery  operations.  We  did  not 
know,  at  the  time  the  Corporate  Automation  Plans  were  assembled,  whether  some 
pieces  of  equipment  could  be  developed  (such  as  the  Carrier  Sequencing  Bar  Code 
Sorter)  or  what  their  operating  parameters  would  be  until  they  were.  We  made  as- 
sumptions, events  occurred,  and  we  have  adjusted  strategies  as  each  challenge  has 

come  along.  ttot-.o      j  • 

The  automation  program  has  already  significantly  impacted  the  USPS  and  its  cus- 
tomers. It  is  surprising  to  read  that  $14  billion  or  $15  billion  in  cost  avoidance  is 
"insignificant."  The  Postal  Service  has  made  very  positive  achievements  and,  when 
it  meets  the  $14  billion-$15  billion,  it  will  have  implemented  the  largest,  longest- 
term  cost  avoidance  program  in  its  history.  Translated  into  potential  costs  to  postal 
customers,  the  estimated  $5  billion  cost  avoidance  to  date  is  roughly  equivalent  to 
three  cents  in  postage  avoided  for  a  First-Class  letter.  Without  automation,  the  cost 
of  a  First-Class  stamp  could  now  be  35  cents. 

Question  A.  Are  these  amounts  actual  savings  from  automation  or  are  they  theo- 
retical estimates?  What  portion  of  these  savings  directly  result  from  automation  ver- 
sus other  factors? 

Answer.  For  any  given  year,  the  net  savings/cost  avoidance  is  the  result  of  the 
combination  of  multiple  projects  and  the  timeframe  of  those  programs  (this  is  de- 
scribed in  detail  in  attachment  I,  which  responds  to  question  number  1).  Except  for 
the  few  years  that  a  project  will  yield  operational  savings,  the  bottom  line  impact 
is  the  result  of  avoiding  costs  that  would  have  resulted  if  the  program  had  not  been 
implemented.  We  are  currently  on  target  to  achieve  the  labor  savings/cost  avoidance 
of  approximately  $3  billion  through  1994,  which  was  projected  in  the  justification 
and  Decision  Analysis  Report  (DAE)  for  the  automation  equipment  approved  by  the 
Board  of  Governors.  We  have  estimated  that,  since  1989,  the  automation  program 
has  saved/avoided  $5  biUion  in  direct  distribution  labor  operations.  Although  these 
are  not  actual  savings,  they  are  not  theoretical  estimates  either.  The  $5  billion  rep- 
resents actual  savings  and  cost  avoidance  in  direct  operations  affected  by  automa- 
tion. The  model  that  was  used  to  calculate  the  $5  billion  mirrors  the  methodology 
that  was  used  to  forecast  projected  savings/cost  avoidance  in  the  DAR  for  the  auto- 
mation program. 

Our  automation  program  spans  a  12  to  15  year  period.  Automation  equipment  for 
DeUvery  Point  Sequencing  is  still  in  the  early  deployment  stage;  in  addition  to  other 
programs  that  are  in  the  pre-deployment  stages,  such  as.  Remote  Computer  Readers 
and  Carrier  Sequencing  Bar  Code  Sorters.  Before  we  can  attribute  the  $5  billion 
savings/cost  avoidance  directly  to  automation  and  not  to  other  factors,  a  detailed  na- 
tional after  cost  study  needs  to  be  conducted  for  the  automation  program.  These 
studies  will  attempt  to  segregate  the  impact  that  each  automation  program  had  on 
the  bottom  line  performance.  However,  due  to  concurrent  deployment  of  automation 
programs,  precise  attribution  of  program  savings/cost  avoidance  to  a  specific  pro- 
gram cannot  always  be  ascertained.  In  addition,  these  studies  cannot  be  conducted 
until  a  program  has  been  fully  deployed  for  an  extended  period  to  ensure  the  syn- 
ergy of  the  total  program  is  captured. 

Question  B.  In  its  recent  report,  GAO  did  not  determine  the  extent  to  which  auto- 
mation has  improved  postal  productivity  because  Postal  Service  data  did  not  permit 
GAO  to  isolate  the  effects  of  automation  versus  other  factors.  Does  the  Postal  Serv- 
ice have  any  actual  data  on  the  effect  of  automation  on  postal  productivity?  If  so, 
please  provide  the  data  to  the  Subcommittee. 

Answer.  As  indicated  in  the  response  to  question  lA,  after  cost  studies  will  be  con- 
ducted on  automation  equipment  programs  as  deployment  is  completed  and  full  op- 
erations are  ongoing.  These  studies  will  be  the  final  determinant  of  productivity  sav- 
ings accomplished,  and  will  provide  a  comparison  with  the  cost  avoidances/savings 
projected  by  the  DARs.  We  have  completed  three  such  cost  studies,  which  indicate 
that  actual  returns  are  close  to  projected  results.  These  studies  have  been  audited 
by  the  Postal  Inspection  Service  and  found  to  be  reasonable.  We  note  that  our  cost 
studies  examine  all  costs,  not  just  those  involving  labor. 

While  no  definitive  data  is  available  at  present,  there  are  certain  indicators  of 
change  that  can  be  utilized  to  track  the  progress  of  the  automation  program.  One 
of  these  indicators  is  the  proportion  of  letter  mail  volume  handled  in  each  t)T)e  of 
operation — automated,  mechanized  &  manual — over  time.  The  pie  charts  below  look 
at  Total  Pieces  Handled  (TPH)  at  the  beginning  of  the  automation  program  analysis 


period,  1989,  and  compare  the  relative  proportions  at  that  point  in  time  with  the^i 
most  current  snapshot,  in  1994.  It  is  obvious  that  a  much  larger  portion  of  our  letter  ' 
mail  is  processed  in  automated  operations  now  than  was  the  case  5  years  ago,  and 
that  the  proportions  handled  in  both  manual  and  mechanized  operations  have  de- 


1989 17  42  41 

1994 11  22  67 

Further,  the  effects  of  automation  on  postal  productivity  become  apparent  when 
data  on  processing  cost  per  1000  pieces  of  letter  mail  is  analyzed: 



















If  the  Postal  Service  had  no  automation  program,  all  letter  mail  would  have  to 
be  processed  either  by  mechanized  equipment  or  manually.  Assuming  the  former, 
then  in  1994  alone,  a  cost  avoidance  of  over  $600  million  would  have  resulted  from 
using  automated  equipment.  This  was  calculated  by  taking  the  difference  between 
cost  per  1000  pieces  for  automated  and  mechanized  mail,  and  multiplying  it  by  the 
TPH  volume  of  letter  mail  processed  by  the  multiline  optical  character  readers  in 
1994.  For  the  entire  period  analyzed,  1989-1994,  the  equivalent  cost  avoidance 
amounted  to  almost  $3  billion.  The  actual  cost  avoidance  would  probably  be  much 
higher  because  some  of  the  mail  would  have  to  be  processed  manually. 

Question  C.  As  GAO  also  reported,  the  cost-saving  impact  of  automation  has  been 
relatively  insignificant.  For  example,  the  Service  estimated  that  the  total  amount 
of  budget  savings  and  cost  avoidance  from  automation,  beginning  in  1987  when  the 
Service  began  investing  in  advanced  optical  character  readers,  through  2005,  would 
be  $14.4  billion.  This  is  about  1.3  percent  of  estimated  total  operating  expenses  for 
the  same  period — about  $1.1  trillion.  Given  that  the  automation  program  was  the 
Service's  principal  strategy  for  controlling  the  growth  of  labor  costs,  what  is  the 
Board's  current  strategy  for  controlling  these  costs  (which  have  accounted  for  about 
82  percent  of  total  operating  expenses  since  1970)? 

Answer.  Currently,  labor  costs  run  about  80  percent  of  the  Postal  Service's  total 
costs.  We  believe  that  the  cost  savings  achieved  bv  the  automation  program  have 
helped  keep  the  costs  from  rising  even  higher.  The  $14.4  billion  in  labor  cost  savings 
and  avoidance  is,  by  anybod5^s  standards,  a  significant  reduction,  even  though  it  is 
1.3%  of  our  total  expenses  since  1987.  The  Postal  Service  continues  to  aggressively 
pursue  cost  savings  programs  and  strategies  for  controlling  labor  costs.  Automation 
continues  to  be  a  major  strategy  in  controlling  labor  costs  with  the  continued  deploy- 
ment of  automation  programs  and  sites  to  capture  these  savings.  Automation  de- 
ployment continues  in: 

•  additional  Multiline  Optical  Character  Readers  (MLOCR)  sites 

•  additional  Carrier  Sequence  Bar  Code  Sorter  (CSBCS)  sites 

•  additional  Remote  Bar  Coding  System  (RBCS)  sites 

•  additional  Small  Parcel  8  Bundle  Sorter  (SPBS)  sites 

•  additional  Integrated  Mail  Handling  System  (IMHS)  sites 

We  continue  to  improve  and  provide  training  to  managers  so  they  can  manage 
labor  resources  more  effectively.  Employee  Development  and  Training  has 
prioritized  training  for  managers  that  move  the  mail.  Through  improved  training, 
our  managers  will  be  able  to  better  optimize  labor  resources  to  handle  the  workload. 
Also,  we  continue  to  deploy  computer  equipment,  systems  and  programs  to  improve 
managers'  ability  to  anticipate  volumes  and  adjust  work  hours.  With  these  reporting 
systems  in  place,  managers  have  current  information  to  make  intelligent  staffing  de- 
cisions to  control  overtime  costs  and  fully  realize  the  benefits  of  automation. 

Another  strategy  of  the  Postal  Service  concerns  wage  restraint.  The  Postal  Service 
is  constrained  in  its  cost  control  efforts  as  a  result  of  binding  arbitration,  which  lim- 
its its  ability  to  effectively  control  labor  costs  and  achieve  labor  savings.  Despite  this 
constraint,  our  labor  negotiators  continue  pressing  for  wage  restraint  and  work  rule 
flexibility  in  labor  contracts. 

The  Postal  Service  continues  the  use  of  lower  cost  noncareer  (transitional  and  cas- 
ual) employees  to  give  flexibility  in  the  workplace  and  to  reduce  overtime.  This  flexi- 


bility  will  enable  the  Postal  Service  to  respond  to  reduced  resource  needs  due  to  au- 
tomation and  workload  fluctuation. 

It  must  be  pointed  out  that  a  number  of  OBRAs  have  imposed  additional,  unan- 
ticipated labor  costs  totaling  $9.3  billion  through  1995  which  have  increased  our  sal- 
ary and  benefits  expenses.  For  1994,  our  annuitants'  COLA  and  health  benefits  ex- 
penses, which  are  components  of  total  compensation  expenses,  were  increased  by 
$1.1  billion.  This  represents  just  over  2%  of  our  total  expenses.  These  uncontrollable 
additional  assessments  have  significantly  raised  our  total  benefits  expense. 

Question  2.  Mr.  Winters,  the  Rate  Commission  estimated  in  the  recent  rate  case 
that  about  82  percent  of  the  Service's  volume  and  revenue  comes  from  the  monopoly 
services — first  class,  third  class,  etc.  In  the  recent  rate  case,  the  Postal  Service  pro- 
jected revenue  of  about  $55  billion  in  fiscal  year  1995;  82  percent  of  that  figure  is 
$45  billion.  Why  should  the  Postal  Service  be  given  the  freedom  on  pricing  that  you 
request  if  82  percent  of  its  revenue  and  volume  is  already  provided  monopoly  protec- 
tion? How  does  additional  fi"eedom  to  set  prices  help  the  Postal  Service  improve  its 
service  performance? 

Question  A.  Using  the  above  figures  as  a  basis,  only  about  18  percent  of  your  vol- 
ume and  revenue  comes  in  from  competitive  mail  classes.  If  the  Service  is  given 
freedom  in  the  competitive  classes  on  pricing,  what  does  the  Board  expect  to  do  to 
improve  service  for  those  classes  that  are  under  the  monopoly? 

Answer.  The  statutory  exclusions  created  by  the  Private  Express  statute  (PES)  ex- 
tend to  "letters,"  rather  than  to  any  specific  classes  or  subclasses  of  mail.  This 
makes  it  difficult  to  make  an  exact  determination  of  what  portion  of  Postal  Service 
volume  and  revenue  comes  from  maU  that  is  protected.  For  example,  while  some 
portion  of  third  class  mail  is  covered  by  the  PES,  other  portions  clearly  are  not. 
Since  the  82  percent  figure  cited  in  the  question  apparently  includes  all  of  thirdclass 
mail,  it  would  appear  to  be  somewhat  overstated. 

Much  more  importantly,  while  the  PES  may  in  most  instances  preclude  mailers 
from  using  a  private  delivery  service  to  deliver  letters,  they  do  not  preclude  poten- 
tial mailers  from  finding  some  other  means  of  transmitting  the  information  that 
might  otherwise  be  conveyed  in  a  letter.  For  any  purpose  to  which  a  letter  can  be 
put,  nonpostal  alternatives  exist.  Personal  and  business  communication  can  be  con- 
ducted by  telephone,  by  fax,  or  by  computer  networks  such  as  e-mail  or  electronic 
fiind  transfers.  Advertising  messages  can  be  conveyed  by  a  variety  of  alternative 
media,  including  newspapers,  magazines,  television,  radio,  billboards,  or  appear- 
ances at  trade  shows.  In  short,  whUe  the  PES  may  inhibit  certain  tjTjes  of  direct 
competition,  they  by  no  means  render  the  Postal  Service's  letter  mail  business  im- 
mune from  competition.  Furthermore,  as  the  electronic  age  blossoms  and  the  infor- 
mation highway  moves  towards  reality,  competitive  pressure  will  increase  dramati- 

In  the  face  of  rising  competition,  therefore,  it  becomes  critical  for  the  Postal  Serv- 
ice to  be  able  in  its  pricing  process  to  distinguish  between  those  services  that  are 
particularly  vulnerable  to  diversion  from  the  postal  system  induced  by  postal  rate 
increases,  and  those  services  which  are  not  so  vulnerable.  For  the  users  left  in  the 
postal  system  who  still  have  to  cover  a  fixed  pool  of  overhead  costs,  it  makes  no 
difference  whether  a  contribution  is  lost  from  a  parcel  mail  category  not  covered  by 
the  PES  when  mail  pieces  move  directly  to  a  private  shipper,  or  from  a  letter  cat- 
egory that  is  covered  by  the  PES  when  mail  pieces  convert  to  an  alternative  medium 
such  as  broadcast  advertising.  As  the  GAO  recognized  in  its  1992  report  on  this  sub- 
ject, the  Postal  Service  needs  additional  freedom  to  be  able  to  respond  of  all  t5rpes 
of  competition,  whether  it  involves  mail  covered  by  the  PES,  or  mail  that  is  not. 

Such  additional  freedom  to  set  prices,  however,  will  not  directly  help  the  Postal 
Service  to  improve  service  performance,  which  is  an  entirely  separate  matter.  Im- 
proved service  performance  comes  essentially  from  two  sources.  The  first  source  is 
improved  managerial  effectiveness,  or  using  the  existing  resources  more  efficiently. 
When  that  is  ultimately  exhausted,  however,  the  only  other  source  of  improved  serv- 
ice performance  is  to  bring  more  resources  to  bear,  at  additional  cost.  The  additional 
freedom  to  set  prices  that  the  Postal  Service  seeks  will  only  insure  that,  at  any 
given  level  of  service  performance,  the  total  costs  of  the  Postal  Service  can  be  allo- 
cated to  produce  the  lowest  cumulative  rate  burden  on  mailers.  While  that  certainly 
will  not  solve  all  of  the  Postal  Service's  problems,  it  is  nonetheless  an  ambitious  and 
worthwhile  objective. 

Question  3.  Past  Budget  Reconciliation  Acts  have  placed  a  significant  financial 
burden  on  the  Postal  Service  and  its  customers.  In  order  to  recoup  some  of  the 
funds,  the  Govemors  have  an  opportvmity  to  recoup  any  prior  years  losses  during 
each  rate  case.  In  this  last  rate  case,  prior  year  losses  totaled  $936  million.  One  con- 
cern with  the  ability  to  recoup  this  amount  is  that  such  an  ability  serves  as  a  safety 
net  for  bad  decisions.  In  addition,  any  profit  incentive  is  compromised  because  of 


the  ability  to  recoup  any  prior  year's  loss.  Have  the  Governors  considered  the  effect 
of  this  ability  to  recoup  prior  year's  losses?  How  does  it  affect  the  financial  condition 
of  the  Postal  Service?  Is  this  ability  to  recoup  prior  years'  losses  a  natural  outgrowth 
of  the  break-even  requirement  of  the  Postal  Service? 

Answer.  The  prior  years'  loss  recovery  mechanism  which  is  included  in  the  postal 
ratemaking  process  is  indeed  a  natural  outgrowth  of  the  break-even  requirement  for 
the  Postal  Service.  It  is  a  necessary  means  to  ensure  the  organization's  financial 
well-being.  In  the  private  sector,  when  an  organization  suffers  a  financial  loss,  it 
is  free  to  raise  its  prices  in  order  to  restore  its  financial  position.  Because  the  Postal 
Service's  ability  to  set  its  prices  is  subject  to  review  by  the  Postal  Rate  Commission, 
a  systematic  means  has  been  developed  to  incorporate  recovery  of  prior  years'  losses 
into  postage  rates.  The  prior  years'  loss  recovery  mechanism  is  not  unlike  systems 
used  in  regulated  utilities. 

The  ability  to  recover  prior  years'  losses  through  postage  rates  is  not  a  "safety 
net"  for  bad  decisions.  Rather,  it  places  additional  upward  pressure  on  postage  rates 
by  forcing  losses  to  be  methodically  added  to  postal  rates.  Unchecked,  reUance  on 
prior  years'  loss  recovery  as  a  substitute  for  breaking-even  would  only  serve  to  make 
postal  products  less  competitive.  This  is,  of  course,  an  element  of  the  Governors'  de- 
cision-making process  when  evaluating  the  timing  and  amount  of  postal  rate  in- 

Finally,  it  is  only  fair  to  point  out  that  many  of  the  Budget  Reconciliation  Acts 
which  have  imposed  significant  financial  burdens  on  the  Postal  Service  have  been 
structured  to  minimize  the  impact  on  current  ratepayers.  This  has  been  accom- 
plished by  timing  the  Acts'  passage  so  that  they  would  be  included  in  prior  years' 
losses,  rather  than  a  rate  case  test  year.  This,  of  course,  has  increased  the  mag- 
nitude of  the  Postal  Service's  losses. 

Question  4.  During  the  past  two  and  one-half  years  of  Mr.  Runyon's  stewardship 
of  the  Postal  Service,  there  have  been  quite  a  few  changes  at  the  corporate  offcer 
level.  Sixteen  of  the  current  21  Vice  Presidents  have  served  less  time  than  the  Post- 
master General  in  their  respective  positions.  Some  key  leadership  positions  are  now 
vacant  such  as  Consumer  Advocate.  What  has  been  the  reason  for  this  turnover  at 
the  corporate  officer  level? 

Answer.  There  are  several  reasons  for  the  changes  we  made  at  the  corporate  level; 
these  included  personal  reasons,  performance  reasons,  and  organizational  redesign 
reasons  when  we  saw  our  original  structure  needed  some  adjustments. 

Question  5.  The  Governors  have  indicated  that  they  will  be  taking  a  more  active 
role  in  the  setting  of  executive  compensation  for  Postal  management.  Would  the 
Governors  please  describe  for  the  Subcommittee  the  situation  surrounding  the  re- 
cent retirement  of  the  Postal  Service's  Consvimer  Advocate,  Ann  Robinson.  As  part 
of  the  Governors  new  emphasis  on  the  accountability  of  postal  officers,  do  the  gov- 
ernors intend  to  include  a  review  of  removals  and  transfers  of  postal  officers? 

Answer.  Postmaster  General  Runyon  advised  the  Governors  that  Mrs.  Robinson 
was  retiring  from  the  Postal  Service,  just  as  he  advises  the  Governors  each  time 
an  offficer  retires  or  is  reassigned.  It  is  our  understanding  that  after  nearly  twenty- 
nine  years  with  the  Postal  Service,  ten  years  as  the  Consumer  Advocate,  Mrs.  Rob- 
inson made  her  decision  that  it  was  time  to  retire. 

It  is  not  the  intent  of  the  Governors  to  review  the  removal  or  transfer  of  a  postal 
officer.  The  law  is  clear,  as  are  the  Bylaws  of  the  Board,  that  officers  are  appointed 
by  and  serve  at  the  pleasure  of  the  Postmaster  General  (39  U.S.C.  section  204  and 
29  C.F.R.  section  4.5).  There  is  one  exception,  however,  the  Bylaws  provide  that  the 
Chief  Postal  Inspector  may  not  be  removed  or  transferred  without  "the  concurrence 
of  the  Governors".  The  Bylaws  also  require,  in  the  event  the  Chief  Postal  Inspector 
is  removed  or  transferred,  that  the  Postmaster  General  is  to  "promptly  notify  both 
Houses  of  the  Congress  in  writing  of  the  reasons"  for  the  action  (39  C.F.R.  section 

Question  6.  The  Postmaster  General  recently  appointed  the  former  Vice  President 
for  Marketing  Systems  as  the  new  Vice  President  for  Human  Resources.  While  the 
individual  chosen  may  be  ably  qualified  for  the  position,  a  cursory  review  of  the  two 
positions  shows  that  the  two  jobs  have  little  in  common.  Do  the  Governors  review 
appointments  to  these  positions  to  insure  qualified  individuals  are  appointed  to 
postal  management  jobs? 

Answer.  In  February  1995  the  Board  established  a  Compensation  Committee  to, 
among  other  charges,  "review  management's  proposed  new  hires  into  positions  at 
the  PCES-II  [officer]  level."  (BOG  Resolution  No.  95-3).  Also,  pursuant  to  the  Reso- 
lution, management  is  to  provide  the  Board,  in  advance  of  appointment,  the  re- 
sumes of  new  hires.  However,  by  law,  the  Postmaster  General  is  vested  with  the 
authority  to  make  officer  appointments.  The  Governors  were  informed  before  the 


fact,  by  the  Postmaster  General,  that  the  Vice  President  for  Marketing  Systems  was 
being  laterally  transferred  to  the  position  of  Vice  President  for  Human  Resources. 

Attachment  I — Detailed  Accounting  of  the  $5  Billion  and  $14  Billion 
Savings  From  Automation 

Automation  Is  a  Long  Term  Program: 

The  projected  cost  avoidance  from  automation  of  $  14  billion  was  based  on  assump- 
tions enveloped  as  early  as  1986  for  the  capital  expenditure  to  convert  single  line 
optical  character  readers  to  multiline  capability.  Since  that  time,  many  technological 
changes  have  occurred,  and  certain  assumptions  in  our  planning  did  not  materialize, 
such  as,  deployment  schedvdes,  volumes  and  workhour  rates.  We  adjusted  our 
course  responsibly  as  each  challenge  developed  to  make  the  most  of  each  oppor- 

Projected  Results  Compared  to  a  Baseline  or  Business  As  Usual  Approach: 

To  provide  a  detailed  accounting  of  the  projected  $14  billion  cost  avoidance,  one 
needs  to  understand  the  methodology  utilized  in  our  DAR  to  project  net  savings  or 
cost  avoidances  over  the  12  to  15  years  on  which  our  economic  returns  are  based. 
All  of  our  automation  programs  start  with  a  business-as-usual  approach.  That  is, 
if  no  new  programs  or  initiatives  are  implemented,  costs  for  the  particular  function 
will  increase  over  time,  simply  due  to  inflation.  For  example,  a  typical  baseline  cost 
could  be  mechanized  distribution  of  "x"  number  of  pieces  per  hour  of  "y"  dollars  an 
hour.  As  labor  costs  rise,  so  would  the  cost  of  that  operation.  As  volume  grows,  the 
cost  of  mechanized  distribution  throughout  the  Postal  Service  would  grow.  A  typical 
investment  'would  be  targeted  at  reducing  the  amount  of  growth  in  that  function. 
The  implementation  of  automated  sorting  moves  mail  out  of  mechanized  distribution 
to  more  productive  operations,  and  results  in  lower  costs  than  would  have  occurred 
otherwise.  However,  in  a  typical  automation  investment,  the  costs  go  up  before  they 
come  down. 

Three  Phases  of  Financial  Impacts: 

In  all  automation  investments,  there  are  three  different  financial  impacts.  The 
first  is  the  implementation  costs  of  deployment,  site  preparation,  training,  initial 
supplies,  and  interest.  These  costs  occur  before  any  savings  are  realized.  The  second 
phase  reflects  the  budgetary  savings  of  the  investment.  As  the  savings  occur,  the 
operating  budgets  in  the  field  are  adjusted  for  the  savings  resulting  from  the  invest- 
ment. Using  our  previous  example,  if  an  OCR  is  installed  to  replace  mechanized  dis- 
tribution, the  workhours  and  costs  for  the  mechanized  distribution  are  removed 
from  the  office's  budget  following  deployment  and  start-up,  usually  four  to  six 
months  after  deployment.  The  final  phase  represents  cost  avoidance.  Once  the  budg- 
et has  been  adjusted  and  the  mechanized  workhours  have  been  eliminated,  there 
are  no  further  budget  adjustments.  From  that  point  on,  costs  of  processing  at  that 
office  are  "x"  hours  or  "y"  dollars  lower  than  they  would  otherwise  have  been  if  the 
OCR  had  not  been  installed.  Thus,  while  we  avoid,  for  example,  100  workyears  per 
year  for  ten  years  after  deployment,  the  budgetary  savings  occur  only  in  the  year 
or  so  when  the  hours  are  being  replaced.  At  that  point,  the  hours  saved  are  now 
in  the  baseUne  budget.  This  is  an  important  point  to  remember  because  automation 
investments  do  not  result  in  new  savings  each  and  every  year. 

Cost  Benefit  Analysis  in  DAR: 

The  Board  of  Governors  who  approve  all  capital  automation  investments,  base 
their  decision  on  the  undiscounted  cash  flow  and  net  present  value  analysis  of  all 
projected  costs  and  savings  presented  in  the  assumptions  of  the  Decision  Analysis 
Reports  which  justify  the  capital  investments.  The  $14  billion  savings/cost  avoidance 
represents  the  accumulated  financial  impact  (as  described  above)  of  all  assumptions, 
in  addition  to  the  interest  expense  and  depreciation  effects  of  all  automation  pro- 
grams that  have  been  approved  through  FY  1994  by  the  Board  of  Governors.  Some 
specific  expense  costs  analyzed  in  automation  programs  are  driven  by  growth  in  vol- 
ume, deliveries,  the  cost  of  labor  and  benefits  and  nonpersonnel  expenses.  Within 
these  totals  are  expense  costs  for  faciUty  and  infrastructure  support,  service  initia- 
tives, service  measurement,  compliance  with  federal  safety,  architectural  barriers, 
environmental  regulations,  and  transportation  cost  increases. 

In  any  given  year,  the  budgetary  impacts  on  the  bottom  line  are  composed  of  costs 
and  savings  from  multiple  projects.  Some  programs  are  in  the  start-up  phase,  others 
are  jdelding  operating  savings,  and  the  earliest  programs  are  avoiding  additional 
costs.  The  estimated  net  savings/cost  avoidance  of  all  programs  is  currently  pro- 
jected to  be  in  the  14+  billion  range  through  2005.  The  following  page  illustrates 


the  model  that  was  used  to  calculate  the  $5  billion  savings/cost  avoidance  for  direct 
labor  operations  affected  by  automation. 

The  computations  of  $5  Billion  estimated  savings  /  avoidance  in  direct  labor  oper- 
ations to  date: 
The  methodology  used  to  arrive  at  the  projected  savings/avoidance  is  based  on  the 
concept  utilized  in  the  DARs.  It  compares  current  costs  (after  implementation)  to 
the  costs  prior  to  automation  implementation.  The  analysis  assumes  if  automation 
had  not  been  implemented  and  the  voliune  of  mail  to  process  increased,  then  the 
work  hours  needed  to  process  the  increased  volume  would  parallel  this  growth. 

In  this  analysis 

•  The  base  year  is  assumed  to  be  1989. 

•  Each  subsequent  year  is  compared  to  the  previous  year,  adjusted  for  workload 

•  For  explanation  purposes,  we  will  look  at  FY  1992,  where  actual  workhour 
usage  is  compared  to  workhour  usage  over  time  based  on  volume  changes.  Simply 
stated,  if  FY  1991  hours  are  equal  to  "X"  and  FY  1992  volume  grew  B%,  we  compute 
the  adjusted  hours  for  FY  1992  as  X  times  1+B%. 

•  The  comparison  between  the  actual  usage  and  the  adjusted  workhours,  shown 
below,  is  the  avoided  cost  (positive)  or  inversely  the  lost  opportunity  (negative, 

•  The  1991  workhours  that  include  hours  for  direct  distribution  of  mail  are  equal 
to  292.8  million  hours.  The  corresponding  weighted  mail  volume  (WMV)  for  1991  is 
equal  to  1.2983  (WMV  is  the  growth  in  mail  volume  compared  to  the  base  year 

•  The  1992  WMV  is  1.3057  which  equals  a  growth  of  .6%.  The  workhours  in  the 
previous  year  times  the  .6%  increase  is  equal  to  the  adjusted  workhours  of  294.5 
milUon  workhours  at  the  same  productivity.  The  FY  1992  actual  workhours  used  in 
mail  distribution,  were  282.1  million  or  a  savings/avoidance  of  12.4  million  hours. 
The  workhour  rate  for  the  corresponding  activities  was  $23.07  per  hour  or  a  savings/ 
avoidance  for  that  year  alone  of  285.4  million  dollars.  The  additional  savings/cost 
avoidance  from  the  base  year,  FY  1991  savings  of  10.2  million  hours  plus  FY  1990 
savings  of  31.2  million  hours  times  the  1992  hourly  rate  of  $23.07  brings  the  total 
savings/avoidance  for  that  year  to  $1,240.8  Million.  This  table  shows  net  effect  of 
each  year's  impact,  as  opposed  to  each  year's  savings  to  the  base  year. 

Determining  Estimated  Total  Costs  Avoided  Due  to  Automation  Program 


Inc  Carrier  In  Office 


















Cost  per  hour  









Weighted  Mail  Volume 










WMV  Change 









Revised  Workhours 









Workhour  Savings  









Dollar  Cost  Avoidance: 






725  2 




287  7 


(85  6) 


















Less  RBCS  Contract 





Note:  Baseline  =  1989. 

The  FY  1994  computations  include  the  effect  of  automation  inclusive  of  carrier  in 
office  hours.  This  coincides  with  the  DAR  projected  savings/avoidance  of  carrier  in 
office  hours,  based  on  projected  delivery  sequenced  mail,  which  as  previously  men- 
tioned had  some  implementation  delays.  The  shaded  calculation  in  the  1994  "Dollar 
Cost  Avoidance"  is  based  on  the  shaded  combination  of  hours/cost  per  hour  and  total 
volume  growth  for  1994,  when  carrier  in  office  hours  are  induded  in  the  comparison. 
The  final  adjustment  to  the  savings/cost  avoidance  is  the  contract  costs  for  Remote 


Bar  Coding  System  (RBCS)  (the  first  sites  were  contracted  out).  The  net  total  sav- 
ings/cost avoidance  from  direct  labor  operations  is  $5.0  Billion. 

If  we  expand  the  analysis  to  include  indirect  labor,  the  savings/cost  avoidance 
would  be  $2.5  billion. 

Mr.  McHuGH.  Thank  you,  Mr.  Chairman.  I  appreciate  that. 

Without  objection,  the  full  written  statement  of  the  chairman 
will  be  submitted  for  the  record. 

I  would  extend — although  I  assume  it's  not  necessary — the  floor 
to  any  of  the  other  Members  who  may  wish  to  make  a  statement 
at  this  time. 

[No  response.! 

Mr.  McHuGH.  Then  let  me  take  over.  You  have  raised  some  in- 
teresting points  in  your  testimony  that  I  think  deserve  discussion, 
and  we  intend  to  do  that,  or  I  intend  to  do  it  here  sometime  this 
morning.  But,  as  they  say,  all  I  know  is  what  I  read  in  the  news- 
papers. Let  me  go  to  an  article  that  did  appear  this  morning.  We 
will  touch  on  current  events  for  the  moment. 

A  news  release  that  was  carried,  I  assume,  in  other  news- 
papers— I  saw  it  in  the  Washington  Post — addressed  the  actions 
that  you  took  yesterday  at  your  regular  meeting  to  put  into  motion 
the  process  necessary  to  increase  the  current  cost  for  services  of 
international  mail.  I  would  assume  that  this  is  going  to  be  some- 
thing that  will  gain  the  attention  of  the  patrons  of  the  Postal  Serv- 
ice, those  who  use  these  kinds  of  products. 

I  was  wondering,  if  you  could  share  with  the  subcommittee  this 
morning,  your  reasoning  behind  that  price  increase  and  how  you 
think  it  would  affect  the  Postal  Service's  ability  to  compete  in  the 
international  mail  market? 

Mr.  Winters.  Well,  of  course,  we  do  think  it  is  going  to  help  us 
compete,  and  it  has  plenty  of  cost  coverage  in  it.  It  will  not  be  sub- 
sidized by  any  other  products  that  we  have.  We  think  the  changes 
are  going  to  help  us  tremendously  and  will  help  the  bottom  line  of 
the  Postal  Service,  in  general,  by  increasing  the  international  rate 
and  redistributing  it  some  to  make  it  more  equitable. 

I  don't  know  if  anybody  else  here  wants  to  comment  on  that  any 

Mr.  McHuGH.  How  much  will  it  affect  the  bottom  line?  What  do 
you  think  the 

Mr.  Winters.  Oh,  gosh.  Do  you  remember  that? 

Ms.  Pace.  We  don't  have  any  real  estimates  of  the  effect  on  the 
bottom  line.  But  when  we  price  our  international  products,  you 
have  to  remember  that  we  don't  only  price  in  relation  to  what  it 
costs  us  to  deliver  to  our  airports  but  also  what  it  costs  them  to 
deliver  in  their  country.  So  these  are  the  factors  that  influenced  the 
pricing  decisions  that  we  made. 

Mr.  McHuGH.  Are  these  mailings  protected  under  the  private  ex- 
press statute? 

Ms.  Pace.  No. 

Mr.  Winters.  They  are  not. 

Mr.  McHuGH.  They  are  not.  So  you're  in  a  competitive  market; 
people  have  a  choice. 

Ms.  Pace.  An  exception  was  granted  in  1986,  and  so  others  par- 
ticipate in  this  market,  and  we  compete  in  this  market. 


Mr.  Winters.  We  will  be  glad  to  give  you  the  information  on 
what  we  expect  the  effect  on  our  bottom  line  to  be. 

Mr.  McHuGH.  The  bottom  line,  and  also,  I  suppose,  the  other  sa- 
lient question  is,  where  does  this  position  you  in  terms  of  your  com- 
petitive abilities  against  others  who  are — I  assume  you  feel  that  it's 
a  comfortable  fit? 

Mr.  Winters.  Yes. 

Mr.  McHuGH.  But  I  would  be  interested 

Mr.  Winters.  We  will  see  that  you  get  that  information. 

Mr.  McHuGH.  Thank  you. 

[The  information  referred  to  follows:] 

With  respect  to  the  proposed  changes  in  international  mail  rates  which  were  pub- 
lished in  the  Federal  Register  on  March  20,  1995,  salient  flnancials  have  been  esti- 
mated as  follows: 

After  rates  revenue:  $1,541,842,000 

Before  rates  revenue:  1,406,447,000 

Net  change  in  revenue:  135,395,000 

The  percent  change  in  revenue:  9.6% 

Cost  coverage:  148.0% 
These  figures  are  calculated  using  FY  1995  as  the  test  year.  They  also  include 
the  anticipated  results  from  new  services  such  as  Worldpost  Priority  Letter,  and 
International  Package  Consignment  Service.  Each  category  of  mail  service  recovers 
its  direct  and  indirect  cost  and  makes  a  contribution  to  institutional  cost. 

With  respect  to  competitive  standing,  international  rates  have  been  set  recogniz- 
ing that  outbound  traffic  is  subject  to  open  competition  from  a  variety  of  service  pro- 
viders. This  does  not  suggest  that  the  Postal  Service  is  primarily  focused  on  price 
competition  in  the  market  place,  although  it  would  be  appropriate  to  note  that  inter- 
national rates  have  been  moving  in  the  direction  of  market-based  pricing. 

While  this  approach  has,  since  1968,  helped  reverse  earlier  trends  in  declining 
traffic,  the  annual  rate  of  growth  for  international  mail  has  been  less  than  the  mar- 
ket as  a  whole.  It  is  difficult  to  thoroughly  document  the  pricing  practices  of  other 
service  providers,  but  it  is  known  that  commercial  transactions  are  generally  con- 
summated using  customer-specific  unpublished  tariffs. 

Ms.  Pace.  Congressman,  we're  very  interested  in  what  we  call 
"demand  pricing,"  and  that  is  pricing  our  product  to  get  increased 
volume.  We  have  given  a  great  deal  of  attention  to  what  this  will 
do  to  volume  growth  and  the  ability  it  will  give  us  to  accomplish 

Mr.  McHuGH.  I  assume  that  question  is  going  to  be  part  of  your 
rate  reclassification  request  that  goes  forward  in  a  few  weeks,  or 
a  week  or  so. 

Mr.  Winters.  We  expect  it  will  be  over  there  around  the  end  of 
this  month,  to  the  Postal  Rate  Commission. 

Mr.  McHuGH.  Yes.  Returning  to  the  Post  article,  it  also  sug- 
gested that  the  Postmaster  General  indicated  at  that  meeting  he 
was  ready  to  move  forward  with  some  specifics  of  new  laws  to  re- 
vise Postal  Service  operations.  That,  obviously,  is  of  great  interest 
to  this  subcommittee.  It's  a  topic  we  discussed  with  the  PMG  when 
he  appeared  before  us. 

Are  you  in  a  position  to  share  some  of  those  specifics  with  us 
here  this  morning? 

Mr.  Winters.  Not  any  specifics,  only  some  generalities.  This  is 
a  very  complicated  area  that  affects  an  awful  lot  of  people,  a  lot 
of  entities  and  a  lot  of  organizations,  not  just  people  living  in  their 
homes.  It  affects  a  lot  of  businesses,  a  lot  of  mailers,  and  we  are 
working  on  that  and  have  been  working  on  that  diligently.  We  have 
staff  working  on  it,  and  we  expect  to  have  some  discussion  papers 
that  we  can  discuss  with  you  in  the  reasonably  near  future. 


Mr.  McHuGH.  Great. 

Mr.  Winters.  And  we  want  to  get  that  done,  too. 

Mr.  McHuGH.  Great.  Well,  I  appreciate  that.  We  have  not  had 
an  open  forum  such  as  this,  an  opportunity  to  discuss  this  issue 
with  you  good  people,  but  it  is  an  area  of  concern  and  it  is  one  that 
we  tried  to  emphasize  to  the  Postmaster  General  when  he  was 
here.  We  are  very  anxious  to  look  at  the  specifics  of  whatever 
changes  you  feel  are  appropriate  to  assist  you  in  the  very  impor- 
tant and  very  complex  work  that  you  have  before  you. 

Mr.  Winters.  We  are  very  anxious  to  get  that  done,  too,  Mr. 

Chairman.  ,    ^  t  j.  ^ 

Mr.  McHuGH.  I  will  return  with  other  questions,  but  1  want  to 
yield  to  my  colleague,  the  gentleman  from  Texas,  for  any  questions 
he  might  have  at  this  time. 

Mr.  Green.  Thank  you,  Mr.  Chairman.  I  have  a  couple  of  ques- 
tions. ,  - 

These  hearings  are  part  of,  I  guess,  a  learnmg  curve  some  ot  us 
have  been  going  through,  and  the  chairman  has  been  good  about 
putting  it  together  for  us.  Last  week  we  heard  from  Mr.  Gleiman 
with  the  Postal  Rate  Commission,  and  he  criticized  the  Postal  Serv- 
ice's poor  data  collection  capabilities  and  said  that  it  prevented  the 
Postal  Service  from  making  proper  recommendations  on  the  m- 
creases.  , 

And  I  know,  as  a  monthly  board,  you  oversee  it,  and  1  wanted 
to  ask,  do  you  believe  this  is  a  real  problem,  and  what  steps  can 
the  board  take  to  remedy  the  problem  that  was  brought  up  by  the 
Postal  Rate  Commission?  ,        ui 

Mr.  Winters.  Congressman,  I  don't  think  that  s  a  real  problem. 
I  know  what  those  errors  were.  I  know  an  awful  lot  of  paper  and 
statistics  goes  over  there  to  the  Commission.  There  were  tens  of 
thousands  of  bits  of  information,  maybe  millions.  It's  almost  impos- 
sible, since  they  are  being  handled  by  humans,  that  there  wouldn  t 

be  some  errors.  j  j  i. 

We  provide  them  with  copious  information,  statistics  and  data. 
We  give  them  information  and  data  continuously  all  year  long.  1 11 
have  to  say  there  is  some  proprietary  information  that  we  do  not 
think  that  our  competitors  ought  to  have  access  to,  and  we  are  very 
reluctant  to  release  that  information. 

For  example,  one  of  Mr.  Gleiman's  complaints  had  to  do  with  in- 
county  newspapers,  that  there  was  an  error  in  the  data.  What  hap- 
pened was  that  the  in-county  newspaper  came  to  management  and 
said,  "We  think  something  is  wrong  here."  So  we  got  our  rate  peo- 
ple on  it,  and  they  looked  at  it  and  found  out  something  was 
wrong,  and  we  went  to  the  PRC  and  changed  the  testimony  and  got 
it  corrected. 

There  was  one  other  complaint  by  the  Brooklyn  Gas  Co.,  I  think, 
on  business  reply  mail.  That  was  discovered  on  cross-examination, 
and  we  corrected  that,  too. 

So,  when  you  have  this  complicated  an  area  and  you  have  human 
beings  working  it,  there  may  be  some  errors.  But  I  think  it's  easy 
to  exaggerate  those  errors  compared  to  the  overall  picture  of  what 
our  statistical  gathering  is.  ^  ^        ■,  ^     x 

Mr.  Gleiman  also  complained— I  don't  know  if  you  referred  to  it 
or  not — something  about  a  reduction  in  workers'  compensation  re- 

234  i 

serve  and  what  we  did  to  that.  We  did  make  an  adjustment  in  No- 
vember. Which  we  have  been  reviewing  each  November  since  1987. 
There  wasn't  anything  new  or  different  about  it.  It  was  different 
than  what  our  test  year  model  was,  that  they  were  acting  upon, 
but  there  was  no  intention  on  our  part  to  try  to  mislead  anybody. 
It  is  in  November  when  we  close  our  books  and  when  our  outside 
auditors  certify  whether  the  reserves  are  appropriate. 

Mr.  Green.  When  you  say  "proprietary  information,"  you're  talk- 
ing about  not  necessarily  it  has  the  protection  but  actually  where 
you  have  competition. 

Mr.  Winters.  Yes. 

Mr.  Green.  There's  no  proprietary  information  dealing  with,  for 
example,  first  class? 

Mr.  Winters.  No.  Nothing  like  that.  Things  that  are  appropriate 
for  ratemaking. 

Mr.  Green.  OK.  A  few  weeks  ago  the  Board  of  Governors  made 
a  decision  on  reducing  the  authority  for  the  Postmaster  on  person- 
nel decisions  and  executive  compensation.  Would  you  want  to 
elaborate  on  that  or  mention  it? 

Mr.  Winters.  Well,  I  think  our  bylaws  have  provided  for  a  good 
while — I  don't  know  just  how  long — but  the  bylaws  have  provided 
for  a  good  while  that  the  Board  of  Governors  are  the  ones  who  fix 
the  salaries.  The  statute  provides  that  the  Postmaster  General  will 
do  the  hiring  of  the  officers,  but  the  bylaws  provide  that  we  fix  the 
salary.  And  it  has  always  been  that  way.  We  have  had  a  rather  ad 
hoc  procedure  for  that  happening  in  the  Board  of  Governors.  Dur- 
ing the  reorganization  in  1992,  when  there  was  some  switching 
around,  the  Postmaster  General  asked  if  he  could  make  some  of 
those  adjustments  within  certain  ranges  without  coming  to  the 
Board  of  Governors.  We  said,  "That's  fine."  Now  that  that  is  in  the 
past,  we  thought  it  was  time  for  us  to  get  back  and  reassume  that 
responsibility,  and  I  appointed  a  Compensation  Committee,  a  for- 
mal Compensation  Committee  to  take  care  of  that.  Mr.  Dyhrkopp 
here  is  the  chairman  of  that  committee. 

I  think  it's  our  proper  function,  and  it  wasn't  a  complaint  about 
the  Postmaster  General.  It  is  something  that  has  been  in  our  by- 
laws for  many  years,  and  we  just  formalized  it  by  having  a  commit- 

Mr.  Green.  Thank  you,  Mr.  Chairman. 

Mr.  McHuGH.  Thank  you. 

Mr.  Winters.  I  might  say,  that  the  committee  can  only  make  rec- 
ommendations to  the  Board  of  Governors.  They  don't  have  the  au- 
thority to  fix  those  salaries.  The  Postmaster  General  makes  rec- 
ommendations, and  the  committee  discusses  it  with  him,  then  they 
make  recommendations  back  to  the  board.  He  just  did  that.  We  ap- 
proved everything  that  he  submitted. 

Mr.  McHuGH.  Mr.  Chairman,  returning  to  the  gentleman  from 
Texas'  comments  on  the  collection  of  data.  I  assume  you  have  been 
briefed.  The  response  to  the  gentleman's  comments  seems  to  sug- 
gest you  are  aware  of  what  Mr.  Gleiman  said. 

But  in  case  you're  not,  certainly  what  is  disturbing  to  me  and, 
I  know,  the  other  Members,  is  that  Mr.  Gleiman  just  didn't  criticize 
what  he  felt  was  an  inadequate  compilation  of  data;  he  believed 
very  strongly  and  seemed  to  indicate  to  us  that  the  way  in  which 


the  Postal  Service  collects  and  compiles  and,  in  fact,  does  not  col- 
lect its  data  is  totally  inconducive  to  good  management. 

That  is  a  statement  that  I  think  is  very  troublesome  to  us.  You 
responded  to  the  gentleman's  comments  very  adequately,  but  I  just 
wanted  to  put  that  before  you.  I  think,  not  that  I'm  criticizing  Mr. 
Gleiman;  I  appreciated  his  candor — that  kind  of  statement  really 
should  be  restated  before  you,  in  case  you  wanted  to  expand  on 
your  earlier  comment.  ,     ^,  .  ,    r       t 

Mr.  Winters.  Well,  let  me  say  that  I  met  Mr.  Gleiman  before  1 
met  anybody  in  the  Postal  Service,  when  I  was  being  considered  for 
this  appointment.  He  was  with  the  committee  in  the  Senate  that 
did  the  confirmations,  and  I  wanted  to  talk  to  him  about  the  Postal 
Service.  I  have  the  highest  regard  for  Mr.  Gleiman  and  the  other 
members  of  the  Postal  Rate  Commission,  and  I  hope  they  do  for  us. 

I  think  they  do.  ,.    .       ,  4.- 

But  sometimes  we  do  run  into   some  jurisdictional  questions 
Sometimes  they  do  have  some  suggestions  about  management,  and 
sometimes  we  may  think  that's  our  prerogative,  about  manage- 
ment. ^,    .  - 

Ms.  Pace.  May  I  supplement  that,  Mr.  Chairman? 

Mr.  Winters.  Yes. 

Ms.  Pace.  The  amount  of  information  that  is  needed  to  manage 
this  very  complex  organization  is  absolutely  overwhelming.  An  or- 
dinary corporation  would  just  set  up  its  data  so  it  could  manage 
its  business  efficiently,  and  that  in  itself  is  a  challenge.  But  what 
we  have  here  is  an  added  requirement  that  we  maintain  a  lot  ot 
data  simply  to  justify  our  pricing  actions,  because  we  must  appear 
before  the  Postal  Rate  Commission  in  order  to  defend  the  actions 
that  we  are  proposing  on  price  adjustments. 

So  we  have  layers  upon  layers  of  information  that  are  required 
to  satisfy  not  only  the  management  of  the  business  but  also  what 
we  need  for  justifying  the  processes  by  which  we  get  our  prices 
changed.  And  there  is  so  much  that  has  to  be  done  that  it's  not  sur- 
prising that  occasionally  an  error  creeps  in.  They  have  had  errors, 
as  well,  and  nobody  has  been  critical  of  that,  because  that  s  just  the 
way  life  is.  ,  ,      .         ... 

But  I  have  found  our  information  to  be  very  businesslike,  very 
useful.  It  comes  to  us  in  a  timely  manner.  Every  time  I  have  asked 
for  additional  information,  it  certainly  has  been  given  to  me.  And 
from  what  I  know,  the  only  time  any  information  is  withheld  is 
when  it  really  would  affect  the  interests  of  our  customers  or  our 
competitive  position,  and  that  is  a  very  natural  position  to  take. 

Mr.  McHUGH.  I  appreciate  those  additional  comments.  I  think  1 
would  be  accurate  in  reflecting  Mr.  Gleiman's  comments  that  it 
wasn't  just  the  accuracy  of  data  that  he  was  concerned  with  al- 
though he  was,  but  it  was  also  what,  in  his  opinion,  was  a  lack  of 
the  formation  of  reasonable  data  before  the  fact  by  the  Postal  Serv- 
ice; that  it  wasn't  compiled  in  ways  which  are  conducive  to  good 
management  practices. 

So  when  a  request  was  made  during  the  course  of  a  rate  proceed- 
ing, the  data  didn't  come  in  a  timely  fashion,  not  because  there 
were  questions  of  propriety,  not  because  there  were  other  questions 
of  accuracy,  but  that  it  was  simply  unavailable  in  the  way  that  he 
felt— and  I  think  it's  fair  to  say,  the  other  members  of  the  Rate 


Commission  with  him  that  day  felt,  as  well,  it  should  have  been 
available.  It  should  not,  in  his  opinion,  have  been  a  tough  task. 

Mr.  Winters.  It  may  have  been,  at  that  time,  Mr.  Chairman.  I'm 
not  positive  about  this,  but  I  can  fmd  out  and  let  you  know.  But 
if  you  recall,  at  that  time,  we  made  an  application  for  a  10.3  per- 
cent across  the  board  increase.  Rather  than  just  saying  the  "aver- 
age" rate  increase  of  all  these  is  going  to  be  10.3,  what  we  actually 
made  application  for  was  a  flat  "across  the  board"  10.3.  That  is  not 
what  the  commission  approved. 

There  were  a  great  number  of  mailers  that  joined  with  us  in  the 
Postal  Service  and  said  to  the  Postal  Rate  Commission: 

Please  let's  do  this.  It's  2  points  under  what  inflation  would  be.  Let's  go  with  this 
10.3  so  the  board  can  then  do  the  reclassification,  and  then  if  we  later  have  to  come 
back  for  a  full-fledged  rate  hearing,  we'll  do  it. 

That's  the  way  that  the  proceeding  was  anticipated  to  be,  and 
that  may  have  lent  to  the  lack  of  some  of  the  current  detail  on 
some  classes  that  the  commission  would  like  to  have  had.  It  was 
a  different  type  of  a  filing  than  the  Postal  Service  had  ever  made 
before.  It  was  across  the  board,  not  just  on  average,  and  except 
with  very  minor  exceptions,  an  across  the  board  increase  for  every- 

Mr.  McHuGH.  I  appreciate  that.  Obviously,  we  are  concerned 
about  any  situation  that  affects  the  management  efficiencies  of  the 
Postal  Service,  but — and  I  know  you  are  as  well 

Mr.  Winters.  Well,  let  me 

Mr.  McHUGH.  Sorry.  Go  ahead,  Mr.  Winters. 

Mr.  Winters.  Excuse  me.  No,  I  was  just  going  to  say,  it's  equally 
important  to  us  that  it  be  accurate,  because  we've  got  to  tolerate 
the  bottom  line  at  the  end. 

Mr.  McHuGH.  No,  I  understand  that.  Accurate,  and  hopefully 
that  those  kinds  of  activities  are  done  in  a  way  that  enhances  man- 
agement efficiencies. 

But  there  was  another  reason  that  we  entered  into  that  discus- 
sion at  all  with  Mr.  Gleiman,  and  that  was  simply  the  concern  that 
you  expressed  here  today,  and  others  have  expressed,  as  to  the 
timeframe  of  a  rate  increase,  the  PRC's  process  in  general,  10 
months,  although  9  months  on  the  last. 

We  are  exploring  the  possibility  that  if  data  were  compiled  and 
maintained  in  a  certain  fashion  that  the  Rate  Commission  felt  was 
useful  and  could  be  provided  in  a  short  timeframe,  perhaps  we 
could  compress  those  rate  hearings  into  less  time.  I  don't  know  if 
there  is  an  opportunity  there  to  get  the  two  sides  together  to  have 
that  done,  or  if,  in  fact,  it  would  be  just  a  marginal  few  hours  in- 

But  we  are  interested  in  that  issue  for  the  additional  reason  that 
perhaps  there  are  some  opportunities  there  to  compress  the  Rate 
Commission  activities  in  the  next  rate  increase. 

Mr.  Winters.  Well,  I  appreciate  your  suggestion  on  that,  and  we 
certainly  will  review  it.  We  do  have  meetings  with  them  when  we 
can  do  it  ethically  and  appropriately,  trying  to  improve  things.  I'll 
give  you  an  example:  In  Mr.  Gleiman's  testimony  he  talked  about 
an  additional  $400  million  that  we're  showing  for  this  year  and 
taking  credit  for.  I  don't  care  who  gets  the  credit,  as  long  as  we 
have  it. 


But,  remember,  we  had — I  believe  we  filed  that  in  about  March, 
seems  to  me  like  it  was  March.  It  took  several  months  for  us  to 
prepare  that  filing.  We  couldn't  just  do  it  overnight.  We  had  to  pre- 
pare it.  Then  we  got  it  filed.  Then  it  took — they  did  it  in  9  months, 
and  we  greatly  appreciate  that. 

Our  fiscal  year  started  approximately  October  1,  1994.  They 
acted  around  Thanksgiving,  as  I  recall,  in  1994,  and  we  put  the 
rate  into  effect  January  1,  1995.  If  we  had  had  a  compressed — if 
we  had  a  shorter  period  for  them  to  act  after  our  filing,  and  if  we 
could  have  gotten  it  done  to  correspond  with  our  fiscal  year,  which 
was  also  our  test  year,  we  would  have  had  that  much  more  benefit 
of  the  higher  rate,  and  our  financial  position  would  be  much  better. 

So  if  they  could  have  acted  earlier,  we  would  have  had  that  much 
more  positive  bottom  line  in  the  Postal  Service. 

Mr.  McHuGH.  You  just  answered  a  question  at  some  point  I 
wanted  to  get  to  today,  in  that  there  seemed  to  have  been — al- 
though I  wasn't  as  interested  in  those  issues  as  I  perhaps  am 
now — an  intent,  on  October  1,  to  implement  the  new  rate  increase, 
£ind  yet  it  wasn't  until  January.  The  timeframe  involved  in  the 
Rate  Commission's  review  is  what  you  would  suggest  the  reason  for 
that  delay  was? 

Mr.  Winters.  That's  right.  Yes. 

Mr.  McHuGH.  What  did  that  3-month  delay  cost  the  Service? 

Mr.  Winters.  I  don't  know,  but  I'll  find  that  out. 

Mr.  McHuGH.  I'd  be  interested  in  that,  as  well. 

Let  me  get  back  to  my  questioning,  because,  as  I  mentioned  be- 
fore. Members  are  coming  in  and  out,  and  I  appreciate  their  mak- 
ing an  effort  to  be  here. 

I  would  like  to  recognize  the  gentleman  from  Maryland,  Mr.  Ehr- 
lich,  for  any  comments  or  questions  he  might  have  at  this  time. 

Mr.  Ehrlich.  Nothing  at  this  point,  Mr.  Chairman. 

Mr.  McHuGH.  OK.  I  thank  the  gentleman  for  being  here. 

Returning  to  the  other  issue  of  rate  hearings,  you  mentioned  that 
you  feel  the  process  is  too  protracted,  too  spread  out.  Can  you  give 
the  subcommittee  any  suggestions  as  to  how  that  process  might  be 
changed  without  eroding  the  protections  that  are  inherent  in  it  and 
I  think  are  important,  so  that  we  could  consider  changing  that  sys- 
tem in  a  way  that  serves  all  parties? 

Mr.  Winters.  Well,  as  I  indicated  earlier,  we  want  to  bring  some 
ideas  to  you  for  discussion  to  see  what  we  think  will  work.  But 
there  are  some  areas  that  we  do  need  to  consider,  that  ought  to  be 
on  the  table.  Anything,  as  you  suggest,  that  would  streamline  the 
procedure  and  allow  us  to  make  adjustments  quickly. 

I  think  there  ought  to  be  some  consideration  of  volume  discounts; 
being  able  to  offer  discounts  based  on  volume,  and  do  it  quickly, 
and  do  it  in  a  manner  that  our  competitors  don't  know  what  price 
we're  going  to  offer  in  competitive  bid. 

There  is  a  procedure,  and  Mr.  Gleiman  mentioned  it,  a  90-day 
procedure  on  Express  Mail.  That's  a  very  cumbersome  procedure 
that  takes  90  days  for  a  completed  hearing,  in  that  case,  and  in  it 
you  have  your  competitors  intervening  in  the  case.  It  doesn't  give 
you  very  much  benefit  to  go  to  a  proceeding  to  get  a  reduced  rate 
for  volume,  if  you're  going  to  bid  against  somebody  that's  in  there 
protesting  what  you're  trying  to  do.  And  he  doesn't  have  to  go  to 


anybody.  So  that  present  procedure,  the  present  rule  that  the  com- 
mission reactivated,  doesn't  give  us  any  help. 

I  think  we  ought  to  consider  being  able  to  make  rate  adjustments 
without  going  to  the  PRC,  so  long  as  they  are  below  the  rate  of  in- 
flation. I'm  not  saying  that's  what  we  must  do;  I  just  think  that's 
something  we  ought  to  consider  and  see  what  the  ramifications 
would  be. 

I  think  there  ought  to  be  some  consideration  of  pricing  based  on 
the  speed  of  delivery  rather  than  on  the  content  of  the  inail. 

Those  are  some  of  the  general  things  that  I  think  we  ought  to 
consider,  insofar  as  the  Postal  Rate  Commission  is  concerned.  I 
want  to  be  sure,  in  appropriate  cases,  that  due  process  is  allowed. 

It  is  an  unusual  situation  in  which  our  competitors  come  and  ap- 
pear as  parties  in  our  hearings,  and  offer  evidence,  and  do  cross- 
examination,  and  get  discovery  on  us  and  on  others,  and  yet,  in 
their  own  business,  in  their  own  product  they  generally  don't  file 
rate  changes  with  anybody.  They  can  change  them  almost  at  will, 
when  they  want  to.  And  a  competitor,  in  one  segment  of  the  mar- 
ket, has  85  percent  of  the  business,  I'm  told,  and  we  have  about 
5  percent. 

So  I  think  those  are  some  of  the  things  that  we  need  to  look  at 
to  see  if  they  will  fly. 

Mr.  McHuGH.  Have  you  had  an  opportunity  to  discuss  those  with 
the  PRC,  with  Mr.  Gleiman? 

Mr.  Winters.  No. 

Mr.  McHuGH.  Do  you  have  a  schedule  where  that  might 

Mr.  Winters.  No,  but  we  do  want  to.  I've  met  with  Commis- 
sioner Gleiman.  The  Postmaster  General  has  met  with  Mr. 
Gleiman.  We  met  with  him  together,  and  we  all  expressed  the  idea 
that  we  want  to  do  some  things.  Some  of  those  things  can  be  done 
probably  without  statutory  change.  Some  of  them  cannot  be  done 
without  statutory  change. 

There  was  a  joint-task  force  on  ratemaking.  Norma  Pace  was 
chairman  of  the  Board  of  Governors  at  the  time.  She  was  the  driv- 
ing force  behind  having  the  task  force  made  up  of  representatives 
of  the  Board  of  Governors  and  representatives  of  the  Postal  Rate 
Commission.  They  reported  in  1992,  about  the  time  I  came  on  the 
Board  of  Governors. 

She  can  elaborate  on  that  a  lot  more  than  I  can,  but  there  were 
several  recommendations  they  made.  One  was  a  "two-by-four," 
where  you  would  have  a  4-year  rate  period,  but  you  could  adjust 
it  in  2  years  without  a  full  rate  hearing.  That  sounded  pretty  good. 
And  a  proceeding  was  started  on  that  by  the  PRC,  but  we  deter- 
mined that  it  didn't  give  us  enough  flexibility;  we  would  be  hung 
with  that.  We  couldn't  act  if  there  was  something  else  that  needed 
to  be  done,  and  therefore  we  opposed  it,  and  it  died. 

I  understand  that  on  the  competitive  services,  how  to  handle 
that,  there  never  was  really  agreement  in  the  task  force. 

Norma,  would  you  like  to  elaborate  on  it. 

Ms.  Pace.  Yes.  I  can  give  you  a  brief  summary  of  that. 

Mr.  McHuGH.  Please  do. 

Ms.  Pace.  When  I  became  chairman,  I  was  disturbed  over  the 
adversarial  relationship  between  the  two  parties,  so  I  commis- 
sioned— with  the  approval  of  the  board  and  certainly  the  involve- 


ment  of  the  board— an  outside  consultant  to  look  at  this  in  an  ob- 
jective way.  The  only  thing  we  said  to  the  consultant  was,  "You 
speak  to  everybody:  our  customers,  us,  the  Postal  Rate  Commis- 
sion. Determine  just  what  is  the  problem  with  the  process  we  now 

have."  ,  „  1  i.        T 

They  produced  an  excellent  report  that,  even  3  years  later,  1 
think  still  applies.  It  indicated  that  the  present  system  we  have 
was  very  detrimental  to  the  Postal  Service.  The  first  thing  that 
should  be  done  is  for  the  managements  of  the  Postal  Service  and 
the  Postal  Rate  Committee  to  get  together  and  set  up  a  task  force 
to  look  into  ways  to  solve  the  problem. 

So  we  did  that.  It  was  an  excellent  task  force.  They  worked  very 
hard  on  the  problem.  And  they  were  supposed  to  look  at  two  areas 
which  the  report  indicated  were  problems  for  the  service.  The  first 
was  the  speed,  the  flexibility  that  we  needed  to  get  our  rate  in- 
creases, because  we  were  always  behind  the  cost  curve.  The  second 
was  the  need  to  price  competitively.  At  just  about  that  time,  the 
GAO  report  came  out,  which  indicated  that  that  also  was  a  prob- 
lem for  the  Service.  ,1  J  ^u 

They  could  barely  get  agreement  on  what  Mr.  Winters  called  the 
"two-by-four,"  which  meant  that  you'd  get  an  automatic  increase 
every  2  years  with  a  very  minor  review,  and  then  every  4  years  a 
very  complete  review,  similar  to  the  Omnibus  Price  Cases,  as  we 
refer  to  them,  that  really  go  on  now  every  time  the  Service  asks 

for  a  price  change.  .      , ,  .  j  j 

We  reviewed  that,  and  we  felt  that  the  major  thing  we  needed, 
namely,  the  ability  to  compete  in  the  marketplace,  was  just  not 
given  to  us.  The  two-by-four,  though  it  was  an  improvement,  was 
only  marginal,  and  we  thought  we  would  have  to  go  back  to  the 
drawing  board  and  rethink  this  whole  process.  ,     j  • 

But  that  challenge  is  still  there,  and  we  really  ought  to  be  doing 

it  again,  j 

Mr.  McHuGH.  So  there  were  recommendations  that  were  agreed 


Ms.  Pace.  That  the  task  force  presented? 

Mr.  McHuGH.  Right. 

Ms.  Pace.  For  approval  by  both  groups.    ,  ,      ,    ^^  .  _, 

Mr.  McHuGH.  And  were  they  approved  by  both  groups.''  ihe 
"two-by-four"  was  approved  by  both  groups? 

Ms  Pace.  We  accepted  the  "two-by-four"  as  reasonable,  but  we 
couldn't  get  any  concurrence  on  what  we  were  going  to  do  in  the 
competitive  areas.  We  needed  to  have  both,  according  to  the  report 
that  had  been  issued.  So  we  simply  did  not  accept  the  two-by- 
four"  We  were  also  in  the  process  of  reclassification,  and  we 
thought  maybe  that  would  help  solve  some  of  our  problem.  So  we 
just  sat  back  and  waited. 

But  I  think  it  is  time  now  to  review  that  process  again  and  get 
on  with  it.  But,  you  see,  we  need  to  have  a  philosophical  acceptance 
that  the  Postal  Service  has  part  of  its  business  in  a  competitive  cli- 
mate and  must  therefore  operate  in  a  competitive  way  or  it  will  not 
succeed.  Now,  if  we  don't  get  that  concurrence,  there's  no  sense  in 
sitting  down  with  a  task  force  and  trying  to  solve  that  problem. 


Mr.  McHuGH.  My  grandmother  always  used  to  say,  a  little 
knowledge  is  a  dangerous  thing.  I'm  very  dangerous  on  these  is- 
sues, because  what  I  have  is  a  little  knowledge,  at  best. 

An  observation:  It  seems  to  me,  in  talking  to  various  patrons  and 
parties  who  are  interested  in  your  work  and  the  work  of  the  Postal 
Service,  and  in  addition  to  the  comments  that  have  been  made  be- 
fore this  subcommittee,  the  situation  whereby  you  had  a  task  force 
in  1992,  and  if  you  look  at  it,  at  first  blush,  it  seemed  to  have  some 
positive  suggestions,  and  yet  they  were  never  implemented. 

If  you  look  at  other  efforts  at  flexibility,  such  as  the  overnight 
mail,  the  90-day  process  that,  for  all  of  its  faults,  is  nevertheless 
an  expedited  one,  it  is  used  by  the  critics  of  the  Postal  Service,  very 
effectively,  to  suggest  that  you  really  don't  want  to  work  to  im- 
prove. And  I'm  not  suggesting  that's  true.  With  my  little  knowledge 
brings  a  whole  new  attitude,  as  well.  I'm  interested  in  progress  and 
product  and  output. 

But  I  think  it  is  in  all  of  our  interests  to  work  to  try  to  rid  our- 
selves of  that  notion  and  rid  ourselves  of  the  opportunity  of  some 
to  put  it  forward.  Because,  as  I  said,  I  think  it's  a  very  effective 

I  appreciate  Governor  Pace's  comments  about  trying  to  work  to- 
gether now,  and  I  think  we  very  much  need  to  do  that. 

Ms.  Pace.  If  I  may. 

Mr.  McHuGH.  Certainly. 

Ms.  Pace.  I  think  that  illustrates  exactly  what  the  problem  is 
here.  Yes,  they  gave  us  this  90-day  rule,  but  if  you  understand  the 
way  the  contracting  process  works,  that  is  meaningless.  Because 
when  you  go  in  and  bid  on  something,  in  the  first  place,  the  bid 
is  a  secret.  Nobody  tells  anybody  else  what  they  are  bidding.  That's 
what  a  contract  bid  is  all  about.  But  we  would  have  to  reveal  ev- 
erything over  a  90-day  period  in  order  to  be  able  to  make  the  bid, 
and  that  just  doesn't  make  sense  in  a  competitive  situation. 

So  we  need  to  understand  what  we're  talking  about  here  when 
we're  sa5dng  what  the  Service  needs  to  do  in  order  to  operate  in 
a  competitive  climate.  That's  the  kind  of  thinking  that  is  essential, 
fundamental,  and  we  ought  to  really  start  right  there. 

Mr.  McHuGH.  Was  there  talk  when  that  authority  was  granted — 
and  I  understand  it  was  for  a  5-year  period — and  did  the  Postal 
Service  make  its  discontent  known?  To  be  very  frank,  I  can't  find 
anything  that,  when  that  authority  was  granted,  you  see  headlines, 
"Postal  Service  calls  this  a  sham.  This  is  meaningless,"  et  cetera. 
Rather,  what  it  looks  like  is  an  opportunity  missed. 

And  I  appreciate  your  explanation,  but  was  there  some  concern 
expressed  at  the  time  of  its  authorization? 

Ms.  Pace.  Except  we  never  implemented  it,  because  it  didn't 
make  sense.  I  guess  that's  the  only  way  I  can  say  it. 

Mr.  McHuGH.  Well,  that's  fine. 

Mr.  Winters.  If  there's  anything  further  on  that,  Mr.  Chairman, 
we'll  get  it  for  you.  I  will  ask  the  staff  to  do  that. 

Mr.  McHuGH.  I  appreciate  it. 

Your  Express  Mail,  all  of  that  is  done  by  bid? 

Mr.  Winters.  Sir? 

Mr.  McHuGH.  All  your  Express  Mail 


Ms.  Pace.  Not  o^jrs,  no.  Ours  is  price  fixed  by  the  Postal  Rate 

Commission.  i^   ,         ^r      •    j- 

Mr.  McHUGH.  Excuse  me.  I'm  not  making  myself  clear.  You  indi- 
cated that  the  90-day  rate-setting  process  authorized  by  the  PRC 
on  Express  Mail  was  meaningless  because  you  have  to  enter  a  bid 

situation.  ,  .     r.  .^  t  ..u-   i 

Ms  Pace.  Well,  if  you  wanted  to  get  volume  out  of  it,  yes.  I  think 
that's  really  what  the  purpose— that's  what  we  mean.  If  the  gov- 
ernment can  get  its  services  from  Fed  Ex  because  it  gets  a  good 
price,  that  shows  you  we  can't  be  competitive  on  volume  business, 
and  this  is  what  we're  talking  about. 

Mr.  McHuGH.  OK.  All  right.  Thank  you. 

Mr.  WI^^^ERS.  Mr.  Chairman. 

Mr.  McHuGH.  Yes.  u     x  ^u  ^       j 

Mr.  Winters.  We'll  write  you  some  information  about  that  ana 
what  the  requirements  were,  which  involved— to  be  able  to  trigger 
the  90-day,  I  understand  that  there  had  to  be  a  change  m  the  pub- 
lished rate  of  a  competitor.  And  there's  one  of  those  competitors. 
Fed  Ex,  that  I  don't  think  has  a  published  rate.  I'm  not  sure  about 
that.  But  I'd  like  to  get  that  information  to  you. 

Mr.  McHuGH.  That's  fine. 

[The  information  referred  to  follows:] 

The  history  of  the  Commission's  special  expedited  Express  Mail  rules,  and  the 
reasons  why  those  rules  have  not  yet  been  tested,  merit  some  further  elaboration. 
First  of  all  it  must  be  understood  that  when  the  Postal  Service  proposed  rules 
which  would  allow  the  Postal  Service  to  respond  quickly  to  competitive  chaUenges 
in  the  market  for  overnight  delivery,  it  was  seeking  for  more  flejability  than  that 
ultimately  incorporated  in  the  Commission's  rules.  For  example,  the  Postal  Service 
proposed  that  hearings  on  the  proposed  market  response  be  held  only  when  mented, 
and  that  issues  be  limited  narrowly  in  any  such  hearing.  The  Commission  rejected 
these  proposals,  and  substituted  proposed  data  and  hearing  requirements  that  ri- 
valled a  major  rate  case.  Throughout  the  long  ratemaking  process  which  lasted 
from  April  of  1988  to  August  of  1989,  the  Postal  Service  repeatedly  identified  prob- 
lems with  these  rules,  problems  that  the  Commission,  for  the  most  part,  dechned 
to  correct.  The  result  was  the  creation  of  rules  that  do  not  allow  the  Postal  Service 
to  respond  competively  to  the  efforts  of  our  competitors  to  expand  their  shares  ot 
the  market  by  negotiating  special  rates  with  customers. 

Given  the  significant  Umitations  of  the  Commission's  rules,  it  is  not  surprising 
that  circumstances  have  not  yet  arisen  in  which  the  Postal  Service  coidd  use  those 
rules  to  any  advantage.  Nevertheless,  having  worked  hard  to  establish  some  kind 
of  special  rule  for  Express  Mail  market  responses,  the  Postal  Service  was  reluctant 
simply  to  let  the  rules  vanish  uder  the  sunset  provisions.  In  addition,  we  have  rea- 
son to  beUeve  that  the  existence  of  the  rules  has  had  some  restraining  competitive 
impact  on  the  pubUshed  rates  of  our  competitors.  The  Postal  Service  favored  their 
extension  for  these  reasons,  not  because  we  find  the  rules  to  be  satisfactory  to  our 
needs  Despite  the  problems  with  the  rules,  however,  the  Postal  Service  continually 
monitors  developments  in  the  market  for  overnight  deUvery  to  determine  if  our  cir- 
cumstances in  that  market  could  be  improved,  however  marginally,  by  usage  of  the 

Mr  Winters.  We're  not  able,  under  the  existing  things,  to  really 
effectively  compete  for  even  the  Federal  Government's  expedited 

mail.  ,   ^,  ,  . 

Mr.  McHuGH.  I  appreciate  that.  And,  as  I  mentioned,  the  real  in- 
terest that  I  hold,  and  I'm  sure  the  subcommittee  holds,  as  well, 
is  trying  to  do  some  things  that  are  meaningful.  If  these  aren't, 
what  can  we  do?  And  I  guess  that's  going  to  take  a  little  coopera- 

Mr.  Winters.  I  have  one  other  thing  you  asked  for.  I  was  handed 
a  note  by  our  General  Counsel  that  says  the  rates  from  October 


1994  to  January  1995  would  have  been  about  $400  million  a 
month,  or  in  the  $1.2  billion  range,  if  our  rate  adjustment  had  been 
effective  on  October  1. 

Mr.  McHuGH.  I  appreciate  that.  So  we've  got  $400  million  that 
somehow,  at  some  point,  is  going  to  have  to  be  made  up  in  the  next 
rate  increase. 

Mr.  Winters.  That's  per  month.  Yes. 

Mr.  McHuGH.  Per  month.  $1.2  billion.  OK.  Thank  you  very 

Let's  talk  a  bit  about  the  reclassification  submission  you  have 
coming  up.  This  is  the  first  since  1970,  yes? 

Mr.  Winters.  Yes,  sir,  I  think  that's  right. 

Mr.  McHuGH.  Obviously,  the  intent,  I  would  assume,  is  to  allow 
the  Postal  Service  to  compete  more  effectively;  correct? 

Mr.  Winters.  Yes,  sir. 

Mr.  McHuGH.  And  it's  probably  not  a  fair  question,  because  all 
of  you  good  people  have  not  been  in  your  roles  for  that  long,  but 
why  is  this  the  first?  Has  there  not  been  a  need  to  enhance  the 
competitive  position  of  the  Postal  Service  prior  to  this? 

Mr.  Winters.  I've  only  been  here  3  years,  so  it's  hard  for  me  to 

Mr.  McHuGH.  I  understand.  I've  only  been  here  two. 

Mr.  Winters.  I  talk  about  hearsay,  but — I  think  there  have  been 
some  efforts  and  some  false  starts  in  the  past.  It  should  have  been 
done.  It  hasn't  been  done.  There's  been  talk  about  it  for  years.  It's 
a  big  job.  It's  an  enormous  job  to  do.  It's  an  enormous  job,  not  only 
to  put  it  together,  but  it's  an  enormous  job  to  satisfy  everybody. 
And  I'm  sure  this  is  not  going  to  satisfy  everybody. 

It's  to  modernize  and  make  us  competitive,  yes,  but  also  to  mod- 
ernize the  subclasses  to  make  the  rate  more  responsive  to  what 
that  subclass  does  and  what  it  costs  to  produce  that  subclass.  In 
other  words,  to  more  equitably  distribute  the  cost  among  the  var- 
ious class  of  mail.  That's  my  view  of  it. 

Somebody  might  get  a  little  stung  on  it  a  little  bit,  and  somebody 
else  may  get  a  benefit  out  of  it.  That's  what  happens  when  you  re- 
adjust. I  suspect  that  there's  been  some  walking  away  from  that  in 
the  past.  This  time  we  stepped  up  to  the  trough  and  we  paid  our 
dues,  and  here  we  go. 

Mr.  McHuGH.  OK. 

Governor  Pace,  did  you  want  to  comment? 

Ms.  Pace.  Yes.  We  have  made  changes  all  along  the  line  in  our 
products.  For  example,  we  gave  discounts  for  presorting.  But  now 
with  automation,  all  of  our  processes  have  changed  so  much  that 
it  seemed  a  good  time  to  take  a  hard  look  at  what  it  actually  costs 
to  get  a  letter  from  here  to  there  and  who  is  helping  us. 

With  the  pre-barcoding,  that  has  saved  the  Postal  Service  a  lot 
of  money,  and  we  wanted  to  be  sure  that  we  had  all  of  these  costs 
allocated  properly.  So,  for  the  first  time,  we  did  a  major  study  on 
the  cost  by  subclasses,  and  on  that  basis  we  were  able  to,  we  think, 
price  much  fairer,  based  upon  what  it  actually  costs  us  to  deliver 
the  mail. 

So  it  isn't  that  we  were  slow  in  it;  it's  just  that  the  processes 
have  now  changed  so  much  that  it  became  essential  to  do  that. 


Mr.  McHUGH.  Let  me  clarify.  I  wasn't  necessarily  suggesting  you 
were  slow.  I  was  curious  as  to  what  some  of  the  factors  were  that 
precluded  or  inhibited  one  prior  to  this,  and  you  have  filled  in  that. 
I  appreciate  that. 

Let's  talk  about  automation  a  little  bit.  Obviously,  this  is  an 
issue  of  continuing  concern  for  everyone  involved  with  the  Postal 
Service,  not  the  least  of  whom  are  the  employees.  And  I  under- 
stand the  troubles  that  they  have. 

Mr.  Chairman,  you  noted  in  your  comments  that  you  are  con- 
templating some  modifications  to  your  automation  system  to  try  to 
help  it  reach  its  yet  unrealized  potential.  You  noted  some  of  the 
savings  that  have  come  about.  I  would  assume  that  you  would 
agree,  and  the  Postmaster  General  has  said  that  there  are  much 
more  savings  that  need  to  be  accrued  out  of  that  process. 

Can  you  help  us  in  sharing  with  us  some  of  the  changes,  modi- 
fications you're  contemplating  on  your  automation  program? 

Mr.  Winters.  Well,  I'm  not  sure  what  he's  thinking  about,  but 
this  automation  process  is  really  a  cost-avoidance  process.  One  of 
the  things  we've  been  slower  than  I  wish  we  were  getting  imple- 
mented is  a  remote  barcode  sorter  system.  We  were  going  to  do 
that  by  contract  and  got  into  a  labor  dispute  about  it.  It  went  to 
arbitration.  The  arbitrator  said,  "You've  got  to  offer  the  job  to  labor 
union  people  first." 

The  Postmaster  General  then  negotiated  with  and  entered  into 
an  agreement  with  the  labor  union  that  70  percent  of  those  persons 
working  in  the  remote  barcode  would  be  transitional  workers,  who 
would  not  be  receiving  union  wages,  and  30  percent  would  be  union 
workers.  All  of  that  proceedings  slowed  us  down  considerably  in 
getting  the  remote  barcode  sorter  system  in  operation. 

There  have  been  several — I  don't  know  how  many  offhand — but 
I  know  there  have  been  a  lot  of  decisions  made  for  the  installation 
of  remote  barcode  sorters  all  over  the  United  States.  I  don't  know 
right  now  how  many  that  will  be.  I  think  that  is  going  to  greatly 
enhance  our  efficiency  in  sorting  the  mail. 

As  you  know,  the  remote  barcode  sorters  are  at  remote  locations 
from  a  mail  facility.  An  image  comes  to  them  on  an  envelope  that 
is  difficult  or  maybe  impossible  to  read  on  the  multiline  optical 
character  readers  that  put  on  the  barcodes.  So  when  they  come 
there,  they  switch  to  the  remote;  the  remote  puts  it  on,  then  it  goes 
back  and  in  some  magical  way  the  barcode  gets  on  there. 

We  have  an  enormous  amount  of  that  type  of  mail,  and  a  lot  of 
that  is  person-to-person  mail.  We  have  also  authorized  expendi- 
tures for  ftirther  enhancements  to  that  system  that  we  think  is 
going  to  make  it  operate  even  faster.  So  I  think  that's  one  of  the 
significant  additions  we're  making  to  our  automation  program. 

When  we  get  that  operation  going  full  tilt,  I  think  that's  going 
to  make  our  delivery  point  sequence  sorters  work  more  efficiently. 
When  we  get  more  mail  in  what  we  call  DPS,  delivery  point  se- 
quence, when  we  get  more  of  that,  it's  going  to  make  it  much  easier 
for  our  carriers  to  get  on  the  street  early.  That's  a  concern  of  ours. 
I  think  that  was  a  particular  concern  of  Mr.  Shays  in  one  of  the 
early  hearings,  and  still  is. 

Carriers  will  not  have  to,  to  that  extent,  do  the  manual  sorting 
that  some  of  them  are  having  to  do  now.  And  we  think  that  is 


going  to  greatly  enhance  our  productivity.  So  those  are  the  main 

One  of  the  things  that  the  Postmaster  General  found  when  he 
came  was  that  some  of  our  equipment,  our  deUvery  point  sequence 
equipment,  was  a  long  piece  of  equipment  that  our  buildings 
couldn't  accommodate  it.  We  were  going  to  have  to  build  more 
buildings  to  accommodate  these  big  systems,  and  that  was  not  a 
happy  idea.  So  he  came  up  with  a  different  design.  He  calls  it  a 
carrier  sequencer — or  something  that  starts  with  "carrier."  Any- 
way, it's  smaller.  It  doesn't  have  quite  the  capacity,  but  it  can  work 
in  smaller  units,  and  I  think  that  is  going  to  help  us  increase  the 
number  of  delivery  point  sequence  sortings  that  we  can  have,  and 
it  will  enhance  our  carriers  taking  the  mail  directly  from  the  sort- 
ing machines  to  the  street  and  save  a  lot  of  time.  That's  what  we're 
looking  for. 

Mr.  McHuGH.  Governor  Mackie,  did  I  see  you 

Mr.  Mackie.  Yes,  sir,  Mr.  McHugh. 

I'm  a  banker  from  Oklahoma,  and  it's  kind  of  interesting  to  com- 
pare the  Post  Office  to  the  banking  industry  that  I  entered  30 
years  ago,  where  we  had  the  old  universal  checks  and  no  transit 
routing  number.  Our  overall  goal  is  to  make  those  letters  go 
through  the  postal  system  like  checks  go  through  the  checking  sys- 

I  know,  even  in  my  small  bank,  making  automation  work  in 
some  departments  is  difficult.  You  can  imagine  taking  40,000  Post 
Offices  and  trying  to  automate  them  while  sending  180  billion 
pieces  of  mail  through  them.  And  sometimes  we  get  reports  that 
it's  not  working  as  thoroughly  as  it  should,  but  it  is  working,  some- 
times not  as  well  as  we  think.  It's  paying  off. 

I  think,  from  this  point  forward,  we're  going  to  start  seeing  a 
multiplying  effect  as  we  get  more  and  more  automation  pieces  out 
into  our  offices.  And  I  hope  someday  the  lady  may  call  me,  like  I 
got  a  call  at  the  bank  last  week,  who  said,  "There's  no  way  that 
check  could  have  gotten  there  that  fast,  before  I  made  my  deposit." 

Mr.  McHuGH.  I've  had  that  happen.  I  appreciate  your  comments. 

We  have  been  joined  by  the  gentleman  from  New  York,  a  long 
time  member  of  the  previous  full  Committee  on  Post  Office  and 
Civil  Service  and  thankfully,  from  my  perspective  and  I  know 
yours,  still  a  member  of  this  subcommittee,  Mr.  Ben  Oilman. 

Mr.  Oilman.  Thank  you,  Mr.  Chairman. 

I  want  to  welcome  Chairman  Sam  Winters  and  our  other  Postal 
Governors  to  our  subcommittee.  I  look  forward  to  reviewing  their 
testimony.  I  regret  that  I  have  some  intervening  committee  meet- 
ings that  have  prevented  me  from  being  here  earlier  and  may  take 
me  away  at  an  early  time. 

It's  the  goal  of  this  panel  to  try  to  help  make  the  Postal  Service 
the  most  competitive  and  efficient  agency  it  can  be.  We've  been 
proud  of  some  of  the  accomplishments,  many  of  the  accomplish- 
ments that  have  been  made  to  date.  In  that  effort,  I  want  to  stress 
that  we  are  concerned  that  we  keep  the  commitments  we  have 
made  to  our  dedicated  postal  workers. 

Each  of  the  Gk)vemors  has  come  to  serve  their  term  on  the  board 
from  different  fields,  and  we  welcome  that  diversity.  As  the  board 
members  are  appointed  to  9-year  terms,  the  position  lends  itself  to 


continuity  and  extensive  experience  with  postal  issues.  We  will  be 
drawing  on  the  experience  from  time  to  time. 

I  want  to  commend  you,  Mr.  Chairman,  for  continuing  this  series 
of  oversight  hearings.  I  know  that  it  has  not  been  easy,  in  light  of 
all  the  other  responsibilities  facing  us,  particularly  with  the  Con- 
tract With  America.  A  hundred  days  are  not  so  bad;  it's  the  hun- 
dred nights  that  we're  all  having  trouble  with. 

I  would  like  to  take  just  a  moment.  I  do  have  a  group  of  postal 
workers  waiting  to  give  me  their  thoughts  in  another  room.  But  let 
me  ask  one  question  that  has  troubled  some  of  us.  That  new  logo 
that  was  adopted,  did  that  come  before  the  Board  of  Governors? 
Did  you  folks  approve  that,  inserting  a  new  logo?  The  newspapers 
said  it  cost  about  $7  million.  Was  the  board  made  aware  of  the 
changeover  cost  that  would  incur? 

Mr.  Winters.  Yes,  sir,  that  was  done,  I  think,  a  couple  of  years 
ago.  It  was  a  presentation  made  to  the  board  by  the  Postmaster 
General  and  his  people,  after  it  had  been  run  by  all  sorts  of  our 
employees'  organizations,  and  so  forth,  for  opinions  about  it,  in  an 
effort  to  change  the  image  of  the  Post  Office  and  the  Postal  Service 
as  being  something  that's  onward  and  upward,  and  aggressive  and 

I  don't  remember  exactly  the  figure.  The  $7  million  sounds  about 
right  to  me,  but  that's  to  be  phased  in  over  several  years.  When 
new  equipment  is  purchased,  we  put  the  new  logo  on  it.  You  don't 
take  the  old  logo  off  and  put  the  new  one  on.  You  put  the  new  logo 
on  it  instead  of  the  old  logo.  When  equipment  is  painted,  the  new 
logo  would  be  put  on  instead  of  the  old  logo. 

It's  not  an  overnight  process;  it's  spread  out  over  a  long  period 
of  time. 

Mr.  GiLMAN.  Our  committee  staff  informs  me  that  some  200,000 
vehicles  that  had  two  eagle  decals,  that  cost  $26  million,  and  then 
they  tell  me,  with  labor  added  to  all  of  that,  it  came  to  another  $10 
million.  They  say  the  total  cost  ranged  around  $43  million,  not  in- 
cluding emblems  on  the  outside  of  buildings,  and  murals,  and  sta- 
tionery, et  cetera.  So  it  came  close  to  about  $50  million. 

Do  you  feel  that  that  was  an  appropriate  investment  at  a  time 
when  we  were  stressed  out  in  some  of  the  other  areas? 

Mr.  Winters.  I'm  surprised  that  it  would  cost  that  much,  and  I 
would  like  for — if  it  would  be  OK  with  you — to  have  one  of  our  peo- 
ple contact  your  staff  people  and  see  if  we  can 

Mr.  Oilman.  Well,  we  would  welcome  what  it  did  cost.  But  most 
important,  I  would  hope  that  the  board  is  taking  a  good,  hard  look 
at  all  of  these  various  expenditures  that  are  out  there. 

[The  information  referred  to  follows:] 

The  cost  of  implementing  the  new  corporate  logo  has  been  minimized  because  it 
is  being  implemented  on  a  "replace  as  depleted"  basis.  Phasing-in  the  program  takes 
longer,  five  to  seven  years,  but  it  holds  the  cost  to  $6.6  million.  This  includes  the 
cost  to  speed-up  the  process  in  the  top  twenty  major  metro  markets  where  street 
collection  boxes,  vehicles  and  some  signs  will  have  the  new  logo  within  an  eighteen 
to  twenty-four  month  time  frame,  instead  of  the  program's  five  to  seven  year  phas- 
ing. Of  course,  newly  purchased  replacement  vehicles,  collection  boxes,  and  signs, 
as  weU  as  new  or  renovated  facilities,  will  have  the  new  look. 

Mr.  Winters.  Mr.  Oilman,  let  me  say,  in  that  regard,  I  believe 
it  was  last  year  or  the  year  before,  I  was  chairman  of  a  committee, 
a  special  ad  hoc  committee  of  the  Postal  Service  to  revise  our  by- 


laws.  We  did  not  want  things  to  be  happening  without  the  Board 
of  Gk)vernors  having  an  opportunity — things  of  significance  happen- 
ing without  the  Board  of  Governors  having  an  opportunity  to  ex- 
press an  opinion  on  it. 

Our  bylaws  do  now  provide  for  such  a  process,  so  that  matters 
of  significant  change  will  be  submitted  to  us,  and  we  can  act  on  it, 
if  we  please. 

Mr.  Oilman.  I  appreciate  your  thoughts,  Mr.  Winters,  in  re- 
sponse to  the  last  question. 

We  talked  to  the  Postmaster  Oeneral  about  timely  transportation 
being  one  of  the  main  problems  today  with  postal  service,  and  Mr. 
Runyon  blamed  RVE  and  multiline  for  delaying  automation.  What 
are  your  thoughts  about  how  we  can  improve  timely  delivery?  I  as- 
sume you  folks  have  looked  that  over. 

Mr.  Winters.  Yes,  sir.  That  is  a  continuous  problem  with  us.  We 
talk  about  it  incessantly,  at  every  one  of  our  meetings.  Where  there 
have  been  known  pockets  of  problems,  such  as  Chicago  and  the 
Washington  area,  we  have  had  the  vice  presidents  in  charge  of 
those  areas  come  and  talk  to  us  repeatedly. 

Remote  barcode  facilities  are  being  installed  all  over  the  United 
States,  and  we  have  appropriated  the  money  for  the  equipment  for 
those.  I  think  that  they  are  going  to  greatly  improve  our  delivery 
process  when  they  go  on-line,  because  they  will  enhance  our  deliv- 
ery point  sequence  equipment  so  that  it  can  get  mail  to  the  carrier 
faster  and  get  it  to  the  street  faster. 

Mr.  Oilman.  Is  the  board  engaged  in  reviewing  the  rewriting  of 
the  Postal  Reorganization  Act? 

Mr.  Winters.  Sir,  say  that  again? 

Mr.  Oilman.  Is  the  board  involved  at  all  in  reviewing  the  rewrit- 
ing of  the  Postal  Reorganization  Act?  Have  you  been  reviewing? 

Mr.  Winters.  Well,  yes,  sir,  we  are  concerned  about  it.  We  don't 
have  a  committee  that's  doing  that,  but  we  have  people  in  the  Post- 
al Service  that  are  reviewing  that.  We  have  a  committee  on  strate- 
gic planning,  and  that  includes  in  its  jurisdiction,  matters  of  that 
nature.  This  has  come  on  us  pretty  fast,  faster  than  I  expected  it 
would.  We  don't  have  specifics  at  this  time,  but  we're  going  to  be 
coming  to  you  with  specifics. 

Mr.  Oilman.  What  are  your  thoughts  about  the  proposal  to  dis- 
solve the  Postal  Rate  Commission,  for  example? 

Mr.  Winters.  I  think  the  Postal  Rate  Commission  serves  a  very 
important  function.  I  think  it  needs  to  be  streamlined.  I  think  we 
need  to  review  what  their  jurisdiction  is,  particularly  with  competi- 
tive services.  I  think  the  streamlining  could  include  several  things, 
such  as  time  for  hearing,  the  extent  of  discovery,  perhaps,  whether 
or  not  we  could  adjust  rates  as  long  as  the  increase  is  below  the 
rate  of  inflation,  without  or  with  some  sort  of  a  limited  hearing. 

All  of  those  are  things  that  I  think  we  should  be  able  to  explore. 
If  we  can  do  it  by  agreement  with  them,  fine.  If  it  cannot  be  accom- 
modated by  rule,  then  it  might  have  to  be  embedded  in  statute. 

Mr.  Oilman.  Mr.  Winters,  one  last  question:  How  does  the  board 
feel  about  privatization? 

Mr.  Winters.  Well,  I  think  that  most  of  the  board  is  concerned 
about  privatization.  I  think  you  first  have  to  say  what  you  mean 


by  "privatization."  Do  you  mean  just  selling  it  off,  or  do  you  mean 
to  let  others  do  the  same  things  we  do? 

I  think  you're  going  to  have  an  awfiil  lot  of  trouble  finding  any- 
body else  that  would  be  willing — any  other  organization  that  would 
be  willing  to  do  what  we  do,  under  the  restrictions,  governmental 
restrictions,  that  we  operate  under.  We  operate  with  a  situation 
that  is  anomalous,  in  that  our  public  has  commercial  expectations 
of  us,  and  yet  we're  shackled  with  governmental  regulations  and 

And  I  don't  think  any  other  business — I  don't  think  a  private  en- 
terprise could  come  in  and  operate  under  the  same  shackles  that 
we  have  and  do  any  better  than  we  do. 

If  you're  talking  about  "commercialization,"  and  let  us  compete  in 
competitive  lines,  I  think  that's  fine.  In  my  opinion,  universal  sei^- 
ice  is  imperative.  I  think  it's  extremely  important  that  we  continue 
doing  what  we're  doing  now,  delivering  to  125  million  addresses,  6 
days  a  week,  177  billion  pieces  of  mail  a  year,  500  million  pieces 
a  day. 

I  think  you're  not  going  to  get  that  without  universal  service.  I 
think  universal  service  and  the  private  express  statute  should  be 
preserved,  for  the  best  interest  of  our  people. 

Mr.  Oilman.  Thank  you.  I  just  had  one  other  thought.  You've  got 
two  vacancies  on  the  board,  have  you  not? 

Mr.  Winters.  Yes,  sir.  Three. 

Mr.  Oilman.  Three.  How  long  have  they  been  vacant? 

Mr.  Winters.  Well,  I'm  sorry  to  say  that  Norma  Pace's  term  ex- 
pired in  December.  She  can  serve  for  a  year  until  her  successor  has 
been  appointed,  and  her  successor  has  been  nominated  but  has  not 
yet  been  confirmed,  Mr.  David  Fineman  of  Philadelphia.  We  hate 
to  lose  Norma.  She  is  an  economist.  She  is  on  the  boards  of  several 
corporations.  She  is  a  great  asset  to  the  Postal  Service,  and  I'm 
sick  that  that's  happening. 

Mr.  Setrakian's  term  expired  a  year  ago  last  December.  He 
served  out  the  additional  year;  now  that  has  expired  as  of  last  De- 
cember, so  that  seat  is  open. 

John  Oreisemer's  vacated  term  expires  in  December  1995.  He 
died  in  1993,  around  July  4.  He  was  out  burning  wood,  or  doing 
something,  clearing  some  land  for  a  July  4  party,  and  had  a  heart 
attack  and  died. 

Mr.  Oilman.  So  you've  got  three  vacant  seats,  some  of  them  for 
quite  a  while,  some  brand  new.  Is  there  any  reason  the  administra- 
tion has  delayed  in  filling  these? 

Mr.  Winters.  I've  gone  over  there  to  the  White  House  a  couple 
of  times  and  asked  him  if  they  would — we  wish  they  would  get  on 
it.  But  Einar  Dyhrkopp  can  tell  you  more  about  that,  I  think,  than 
I  can. 

Mr.  Dyhrkopp.  I'll  give  you  an  example  of  why  I  think  they 
haven't  been  filled.  They  have  talked  to  some  people  about  it.  The 
White  House  referred  two  of  them  to  me  to  tell  them  about  some 
experience  that  I  suffered  through  on  the  appointment  process  and 
the  confirmation  process,  then  also  about  what  our  duties  are  as 
a  Oovernor. 

I  had  a  young  lady,  an  attorney  out  of  Little  Rock,  call  me,  and 
she  wanted  to  know  all  about  it.  And  I  explained  it  all  to  her.  I 


told  her  that  in  my  case  it  took  8  months  to  go  through  the  con-' 
firmation  process,  and  nothing  was  left  that  wasn't  totally  exposed 
to  everybody:  your  health  records,  your  financial  records,  you  name 

After  you  get  done  with  that,  then  you  have  quite  a  bit  more. 
You  have  to  give  a  record  of  all  your  political  contributions.  You 
have  to  give  your  IRS  filings  for  the  last  3  years  to  everybody.  That 
alone  is  a  discouragement,  when  you  go  through  all  of  that. 

But  then  there's  the  compensation.  Like  our  chairman  said,  it 
started  in  1971  at  a  rate  of  $10,000  plus  $300  per  meeting  day, 
which  back  in  those  days,  compared  to  Congress,  the  Supreme 
Court,  the  Federal  employees,  you  name  it,  wasn't  bad  for  a  part- 
time  situation.  But  now — it  has  never  been  raised — and  everybody 
else  has  had  a  200  percent  increase  since  those  days. 

Now,  I  don't  know  if  the  pay  purposely  hasn't  been  raised  or 
why,  but  something  is  wrong  about  it.  Because  if  you  do  this  job — 
you  can't  do  this  job  and  come  into  Washington,  or  wherever,  for 
a  day  and  a  half  and  do  it  in  that  time.  It's  just  impossible.  If  you 
do  the  job  and  really  want  to  be  an  effective  member,  you  have  to 
read  at  least — at  least — 3  or  4  hours  a  day  or  a  night,  every  day, 
in  order  to  keep  up. 

And  then  to  give  the  oversight,  you've  got  to  attend  different 
types  of  meetings.  You've  got  to  go  visit  facilities.  You've  got  to  talk 
to  employees.  And  that's  the  only  way  you  can  do  it.  And  the  Gov- 
ernors are  now  doing  that.  And  your  mail  delivery  is  better,  and 
it's  going  to  get  better,  but  that's  because  your  Governors  are  in 
there  fighting  and  working  hard  to  do  it. 

But  that's  the  reason  that  you  haven't  had  anybody  else  come  on. 

Mr.  GiLMAN.  Thank  you,  Mr.  Chairman  and  Mr.  Dyhrkopp. 

Mr.  Chairman,  I  think  we  ought  to  take  a  look  at  the  vacancies 
and  what  we  could  do  to  be  of  assistance.  Thank  you  for  conducting 
this  hearing. 

Mr.  Winters.  Thank  you,  sir. 

Mr.  McHuGH.  I  thank  the  gentleman  for  his  comments. 

We  are  honored  to  have  been  joined  by  the  ranking  minority 
member  of  the  full  committee,  the  gentlelady  from  Illinois,  Cardiss 
Collins.  I  yield  to  the  gentlelady  for  any  questions,  comments,  or 
statements  she  would  like  to  make. 

Mrs.  Collins  of  Illinois.  I  thank  you  very  much.  I  have  sub- 
mitted a  statement  that  I  would  like  to  have  made  a  part  of  the 
record,  Mr.  Chairman. 

Mr.  McHuGH.  Without  objection. 

[The  prepared  statement  of  Hon.  Cardiss  Collins  follows:] 

Prepared  Statement  of  Hon.  Cardiss  Collins,  a  Representative  in  Congress 
From  the  State  of  Illinois 

Good  morning  and  welcome.  Today  marks  the  third  oversight  hearing  on  the  U.S. 
Postal  Service.  With  Postmaster  General  Marvin  Runyon  calling  for  the  deregula- 
tion of  the  Postal  Reorganization  Act  of  1970  and  requesting  authority  to  "run  the 
Postal  Service  more  like  a  business",  I  would  say  that  we  all  have  our  work  cut  out 
tor  us,  you  perhaps  more  so  than  others. 

The  Postal  Rate  Commission  (PRO  testified  at  last  week's  subcommittee  over- 
sight hearing  that  Postmaster  General  Marvin  Runyon,  inspite  of  his  pleas  for  au- 
thority to  shOTten  and  simplify  the  rate  setting  process,  does  not  need  additional  au- 
thority. Mr  Gleiman  expressed  shock  that  senior  postal  officials  were  unaware  of 
the  ratemaking  recommendations  contained  in  a  joint  PRC/Postal  Service  Task 


Force  Report.  Chairman  Gleiman  also  took  issue  with  the  PMG's  rosy  description 
of  postal  finances,  highlighting  instead  the  Postal  Services'  negative  equity  of  $6  bil- 
lion. He  went  on  to  share  GAO's  assessment  that  despite  billions  spent  on  new  fa- 
cilities and  new  automation,  postal  costs  are  still  not  under  control.  Finally,  Chair- 
man Gleiman  expressed  deep  concern  over  the  quality  and  quantity  of  accurate  rate 

In  a  nutshell,  PRC  Chairman  Ed  Gleiman  and  PMG  Marvin  Runyon  fundamen- 
tally disagree  over  the  status  of  the  Postal  Service.  These  discrepancies  must  be  re- 
solved by  this  Subcommittee  and  the  Board  of  Governors.  I  look  forward  to  working 
with  you  to  see  that  otir  citizens  receive  the  best  postal  service  available.  I  also  urge 
you  to  use  the  powers  Congress  and  the  President  have  vested  in  you  to  ensure  that 
the  Postal  Service  fulfills  its  mandate.  Thank  you. 

Mrs.  Collins  of  Illinois.  Last  week  the  Postal  Rate  Commis- 
sion appeared  before  the  subcommittee,  and  Chairman  Gleiman 
differed  from  Postmaster  General  Runyon  on  many  different  areas 
of  the  Postal  Service:  negative  equity  of  $6  billion,  automation  ben- 
efits yet  to  be  realized,  accurate  rate  information,  and  so  forth. 

I'm  wondering,  what  do  you  think  about  the  difference  between 
the  Postal  Rate  Commission's  and  the  Postmaster  General's  assess- 
ment of  the  Postal  Service? 

Mr.  Winters.  Well,  I  know  that  the  chairman  of  the  Postal  Rate 
Commission  had  some  criticisms  to  make,  but  I  think  he  thinks 
highly  of  the  Postal  Service.  That's  what  he  has  said  to  me. 

I  think  that  there  are  some  differences  in  some  of  those  figures. 
Say  our  negative  equity,  our  negative  equity  is  due,  in  very  large 
part,  to  the  failure  of  the  Congress  to  fully  fund  revenue  foregone 
and  imposing  the  OBRAs  on  us.  I  will  be  glad  to  furnish  informa- 
tion to  you,  if  you  would  like,  in  that  regard. 

Mrs.  Collins  of  Illinois.  Yes,  I  would. 

Mr.  Winters.  I  think  what  you  will  find  is,  that  the  negative  eq- 
uity is  largely  because  of  that.  The  $4.7  billion,  I  think,  that  the 
chairman  of  the  Postal  Rate  Commission  referred  to,  as  opposed  to 
some  $14  billion  that  the  Postmaster  General  referred  to,  has  to  do 
with  savings.  We're  talking  about  savings  with  the  restructuring. 

Before  the  time  that  the  Postmaster  General  came  in,  it  was  an- 
ticipated that  the  rate  increase  would  have  to  be  filed  a  year  ear- 
Uer  than  it  was  filed  and  it  would  have  to  be  at  35  cents.  The 
money  saved  fi'om  the  restructuring  is  included  in  the  Postmaster 
General's  calculations  and  not  included  by  the  chairman  of  the 
Postal  Rate  Commission.  And,  again,  we're  operating  in  something 
that  somebody  else  did  and  not  me.  I  would  be  glad  to  have  some- 
one furnish  that  to  you. 

Mrs.  Collins  of  Illinois.  If  you  would,  that  would  be  very  help- 

Mr.  Winters.  Yes. 

[The  information  referred  to  follows:] 

The  Postal  Service  and  the  Postal  Rate  Commission  do  not  have  any  disagreement 
about  the  size  or  seriousness  of  the  Postal  Service's  negative  equity  position.  We 
agree  that  the  Postal  Service  must  improve  its  equity  position  or  face  serious  finan- 
cial difficulties  in  the  future.  Any  differences  of  opinion  between  the  Postal  Service 
and  the  Comnnission  pertain  to  the  effectiveness  of  the  prior  years'  loss  recovery 
mechanism  included  in  postal  rates.  Although  one  of  the  Commissioners  issued  a 
dissenting  opinion,  the  Commission  as  a  whole  ultimately  endorsed  the  concept,  al- 
beit with  reservations.  We  plan  to  prove  the  effectiveness  of  the  prior  years'  loss  re- 
covery mechanism  through  progress  in  restoring  equity. 

To  a  large  extent,  the  Postal  Service's  negative  equity  is  due  to  factors  outside 
its  control.  OBRA  costs  have  had  a  tremendous  impact  on  the  Postal  Service's  equity 
situation,  reducing  equity  by  about  $2.6  billion  through  the  end  of  FY  1994.  In  addi- 


tion,  the  Postal  Service  has  realized  an  additional  negative  impact  on  equity  of  $647 
million  due  to  revenue  forgone  funding  shortfalls  in  fiscal  years  1991,  1992,  1993 
and  1994. 

The  following  table  reflects  the  OBRA  costs  incurred  by  the  Postal  Service  and 
the  amounts  which  have  been  recovered  through  postage  rates  as  of  the  end  of  FY 
1994  along  with  the  impact  of  the  unfunded  revenue  forgone  appropriations  ($  in 

OBRA  Costs       Recovered  via       Unrecovefed       p""' ,  L  i^         Cumulative 
Incurred  Rates  (Cumulative)  "„.  Total 










































I  do  not  see  a  real  disagreement  between  the  Postal  Rate  Commission  and  the 
Postal  Service  regarding  the  ultimate  savings  from  restructuring.  The  $4.7  billion 
figure  cited  by  Chairman  Gleiman  is  the  size  of  the  rate  increase  sought  by  the 
Postal  Service  and  approved  by  the  Postal  Rate  Commission.  The  $14  billion  figure 
should  be  placed  in  its  proper  context.  If  Marvin  Runyon  had  not  led  the  Postal 
Service  through  a  sweeping  restructuring,  cut  overhead  and  reduced  the  size  of  its 
interest  expense,  the  Postal  Service  would  have  had  to  implement  a  35  cent  First- 
Class  rate  in  late  1993.  The  outstanding  efforts  of  our  postal  employees  in  imple- 
menting these  changes  enabled  us  to  hold  rates  steady  for  an  unprecedented  fourth 
year  and  keep  the  increase  below  the  rate  of  inflation.  The  result  of  this  smaller, 
delayed  rate  increase  was  to  save  our  customers  $14  billion  in  postage  costs. 

Mrs.  Collins  of  Illinois.  Well,  do  you  need  or  want  any  statu- 
tory authority  to  ensure  that  the  Postal  Service  is  better  able  to  op- 
erate like  a  business? 

Mr.  Winters.  Yes,  ma'am,  we  sure  do. 

Mrs.  Collins  of  Illinois.  Do  you  need  it  or  you  want  it,  which 

Mr.  Winters.  Well,  I  think  we  need  it,  and  we  want  it  too.  There 
has  been  a  lot  of  study  done  on  this  inside  the  Postal  Service,  with 
competent  people,  and  we  expect  to  make  some  suggestions  to  this 
subcommittee  in  the  very  near  future  on  specifics. 

Mrs.  Collins  of  Illinois.  I  have  some  very  serious  concerns 
about  labor.  In  my  district  in  Chicago,  I  have  the  main  post  office, 
and  I  have  talked  to  the  postmaster  there.  But  more  important 
than  that,  I  always  get  these  calls  and  letters  from  postal  workers, 
and  they  are  not  always  happy.  So  I  need  to  ask  you  what  changes 
should  be  made  in  the  area  of  collective  bargaining  and  labor-man- 
agement relations? 

Mr.  Winters.  That  is  really  something  we  would  like  to  know, 
too.  We'd  like  to  really  improve  that.  The  Postal  Service  is  not  any 
better  than  its  people.  Every  time  I  hear  that,  that  our  people  are 
unhappy,  it  makes  me  unhappy,  because  we  don't  want  it  to  be 
that  way. 

I  think  they  are  well  paid.  They  do  have  good  security.  I  do  think 
that  many  of  our  workers  think  that  our  appeal  process  is  too  cum- 
bersome, takes  too  much  time. 

Mrs.  Collins  of  Illinois.  Is  there  any  way  to  streamline  the 

Mr.  Winters.  Well,  it's  going  to  take — some  of  that  is  internal 
and,  I  think,  is  in  the  labor  contracts.  I  don't  know  how  that  can 


be  changed.  Some  of  it  is  statutory.  Maybe  some  of  that,  with  the 
Merit  Systems  Protection  Board  in  particular,  maybe  some  of  that 
can  be  changed  to  some  extent.  Some  of  it  goes  through  0PM,  I  un- 

But  that  is  a  part  of  the  things  that  we  want  to  look  at.  We  do 
not  want  those  kinds  of  problems.  We  want  our  people  to  be  operat- 
ing at  maximum  capacity. 

Mrs.  Collins  of  Illinois.  Let  me  say  that  I  have  some  concerns 
about  the  fact  that  Robert  Harris'  position  was  changed  from  that 
of  vice  president  for  Legislative  Affairs  to  the  Diversity  Depart- 
ment, and  I  would  like  to  know  the  genesis  of  that  change  and  why 
that  happened,  please? 

Mr.  Winters.  Well,  there  was  a  vacancy  in  Diversity.  The  stat- 
ute provides  that  the  Postmaster  General  makes  those  decisions, 
that  he  is  the  one  who  selects  the  officers  of  the  Postal  Service,  and 
he  did  that.  My  understanding — I  worked  with  Bob  Harris,  and  my 
understanding  of  his  background  is  that  he  was  very  much  in  the 
forefront  of  diversity  legislation,  and  that  sort  of  thing,  in  the  Sen- 
ate side,  as  a  staff  person. 

Mrs.  Collins  of  Illinois.  Was  the  postmaster  overruled  in  that 

Mr.  Winters.  Overruled?  No,  he's  in  the  position  now. 

Mrs.  Collins  of  Illinois.  No,  by  that  I  mean.  Postmaster 
Marvin  T.  Runyon.  Wasn't  there  a  new  structure  set  up  which 
would  not  allow  him  to  just  appoint  or  bring  aboard  whoever  he 
wanted  to,  as  a  result  of  that  particular  case? 

Mr.  Winters.  No. 

Mrs.  Collins  of  Illinois.  Well,  explain  it  to  me. 

Mr.  Winters.  Oh,  you're  going — are  you  talking  about  the  Com- 
mittee on  Compensation? 

Mrs.  Collins  of  Illinois.  Compensation  Committee,  yes. 

Mr.  Winters.  The  bylaws  of  the  Board  of  Governors  for  many 
years,  I  don't  know  how  long,  but  for  many  years  have  provided 
that  the  salaries  of  officers  will  be  determined  by  the  Board  of  Grov- 
ernors.  The  selection  of  the  officers  is  by  the  Postmaster  General. 

My  understanding  is  it  had  been  more  informal,  perhaps  on  an 
ad  hoc  basis,  that  the  salaries  would  be  approved  that  way  by  the 
Board  of  Governors.  When  the  Postmaster  General  came  in,  about 
July  1992,  he  asked  if  he  could  have  that  authority  because  he  was 
making  substantial  changes,  and  he  wanted  to  be  able  to  do  that, 
adjust  compensation,  within  certain  limits.  And  we  gave  it  to  him, 
not  forever,  but  we  gave  him  that. 

Mrs.  Collins  of  Illinois.  Did  he  understand  that  this  was  not 
in  perpetuity? 

Mr.  Winters.  Oh,  I  think  so.  I  don't  remember  that  we  said  that, 
but  there  never  was  any — ^by  appointing  a  formal  committee,  that 
I  did  the  first  of  the  year  for  that  purpose,  there  was  no  intention 
to  reduce  his  status  or  demonstrate  a  dissatisfaction.  It's  nothing 
more  than  setting  up  formally  what  we  had  long  had  in  our  bylaws. 

Mrs.  Collins  of  Illinois.  My  understanding  is  that  the  timing 
of  the  Compensation  Committee  came  on  the  heels  of  this  transfer 
of  Mr.  Harris.  Did  the  board  have  any  thoughts  on  that  action? 

Mr.  Winters.  There  never  was  any  action  taken  on  it.  There  may 
have  been  some  individual  feeling  of  some  board  members,  but 


there  was  never  any  discussion  of  it  in  a  board  meeting,  which  I 

Mrs.  Collins  of  Illinois.  I  have  no  further  questions.  Thank 
you,  Mr.  Chairman. 

Mr.  McHuGH.  I  thank  the  distinguished  ranking  member  for  her 
questions  and  for  being  here  today. 

Let  me  give  you  an  opportunity  to  grade  the  current  Postmaster 
General.  Can  you  tell  us  how  you  feel  he's  meeting  his  charge  and 
how  your  relationship  is? 

Mr.  Winters.  Mr.  Chairman,  I  think — I  was  there  during  inter- 
views of  people  to  hire,  after  Tony  Frank  had  resigned  as  Post- 
master General.  Marvin  Runyon  was  far  and  away  shoulders  above 
anybody  else  we  interviewed,  a  man  with  his  experience  of  having 
been  with  Ford  Motor  Co.,  involved  in  automation,  I'm  not  sure  ex- 
actly what  his  title  was,  but  I  think  he  was  vice  president  in 
charge  of  manufacturing  for  Ford  Motor  Co.,  a  big  job. 

He  left  that  and  built  from  ground  up  the  Nissan  plant  in  Ten- 
nessee, which  a  friend  of  mine  in  Austin  who  is  an  automobile  deal- 
er, who  had  been  a  Lincoln  dealer,  said  was  the  best  product  that 
Nissan  made  anywhere.  And  then  Mr.  Runyon  went  to  TVA  and  he 
touched  that  up,  considerably  reducing  expenses  and  increasing  ef- 

So  he  was  obviously  the  type  of  man  who  was  active  and  some- 
body who  had  courage  and  would  do  things.  And  we  hired  him.  He 
did  shake  up  a  lot  of  things.  I  can't  say,  personally,  that  everj^hing 
that  he  did  was  p)erfect.  Second-guessing,  I  can  say  some  things  I 
wish  he  had  done  maybe  a  little  bit  differently.  But  I  think,  overall, 
in  my  judgment,  he  has  done  a  fine  job  and  that  things  are  going 
to  get  better  under  his  administration. 

As  far  as  I  am  able  to  determine,  he  is  open  with  the  Board  of 
Grovemors.  He  doesn't  have  a  thin  skin,  insofar  as  we  are  con- 
cerned. Information  we  want,  he  gets  for  us.  I  have  not  worked 
with  other  Postmaster  Generals,  so  I  can't  compare.  I  did,  just  a 
very  short  time,  a  space  of  2  or  3  months,  with  Tony  Frank.  So  I'm 
not  in  a  position  to  compare. 

But  there  were  things  that  were  obvious  that  needed  to  be  done 
to  modernize  the  Postal  Service  and  get  it  in  a  competitive  state, 
and  he  undertook  to  do  it.  Therefore,  I  support  him. 

Mr.  McHuGH.  Governor  Alvarado. 

Ms.  Alvarado.  Mr.  Chairman,  if  I  may.  Thank  you. 

I  just  wanted  to  say,  as  the  only  member  of  the  board  from  this 
particular  area,  that  I  am  personally  very  satisfied  with  the  latest 
improvements  in  service  in  my  particular  neck  of  the  woods.  Al- 
though I  may  be  satisfied,  I'm  still  watching  the  system,  as  is  the 
rest  of  the  board,  at  this  particular  area,  as  it  improves. 

I  know  that  Congresswoman  Collins  perhaps  is  probably  not  as 
happy  about  the  Chicago  situation,  but  I  think  and  hope  she  might 
concede  that  it  is  improving,  slowly  but  surely. 

So,  on  that  score,  I  think  the  Postmaster  General  should  be  given 
an  improving  mark.  I  guess  the  important  question  is,  what  kind 
of  a  grade  will  we  give  him  after,  you  know,  the  change  and  tumult 
that  occurs  as  a  result  of  this  year  and  the  next  coming  year. 

Mrs.  Collins  of  Illinois.  Mr.  Chairman,  if  I  may. 

Mr.  McHuGH.  I  yield  to  the  gentlelady. 


Mrs.  Collins  of  Illinois.  Governor  Alvarado,  are  you  aware  of 
how  long  these  problems  have  gone  on  in  Chicago  and  other  cities? 

Ms.  Alvarado.  I'm  afraid  we  have  all  become  intimately  involved 
in  how  long  the  service  diminution  has  occurred.  I  think  what 
we've  tried  to  do  is  take  a  different  approach  than  past  boards. 
First  of  all,  we  are  keeping  ourselves  abreast  of  all  the  proposed 
actions  that  are  going  to  be  taken  to  reverse  negative  service  and 
put  service  back  into  the  positive  column.  More  importantly,  we  are 
monitoring  it  on  a  regular  basis. 

We  have  been  getting  reports,  for  example,  from  Mr.  Pankey  on 
this  area,  in  particular,  and  then  also  on  Chicago,  on  a  regular 
basis,  thanks  to  Governor  Dyhrkopp  and  the  rest  of  the  board's  in- 
terest in  making  sure  that  just  because  we  have  an  action  plan 
that  we're  not,  you  know,  forgetting  about  the  action  plan,  but  con- 
tinuing to  monitor  it  as  it  continues  to  improve. 

Mrs.  Collins  of  Illinois.  Can  you  tell  me  what  your  action  plan 
is,  so  that  we  can  expect,  in  some  reasonable  amount  of  time,  that 
people  are  going  to  get  their  mail  delivered  on  time,  that  it's  not 
going  to  be  hidden  in  closets,  that  it's  not  going  to  be  stuck  up 
under  viaducts,  that  it's  not  going  to  be  burned  in  fires  in  people's 

Ms.  Alvarado.  It's  a  shame  that  all  those  things  occurred,  but 
I  think  it's  important  to  note  that  a  lot  of  changes  have  occurred 
in  personnel  there.  While,  as  you  said,  these  problems  haven't  de- 
veloped of  late,  they  have  developed,  unfortunately,  over  a  number 
of  years,  it's  going  to  take  a  little  while,  perhaps — and  I  can  under- 
stand your  impatience 

Mrs.  Collins  of  Illinois.  Do  you  have  a  time  certain  when  you 
hope,  or  have  a  goal  toward  which  you're  acting  that  these  will  not 
be  the  case  anymore? 

Ms.  Alvarado.  Well,  we  certainly  expect,  with  each  passing 
quarter,  for  service  to  improve,  and  I  think  it  has  so  far. 

Mrs.  Collins  of  Illinois.  But  you  mentioned  your  plan,  do  you 
have  an  overall  plan  for  5  years,  for  10  years,  for  2  years,  for  6 
months,  or  for  what  length  period  of  time? 

Ms.  Alvarado.  Well,  we're  monitoring  it  short-term  by  having 
these  reports  to  us  on  a  monthly  basis. 

Mrs.  Collins  of  Illinois.  What  will  you  be  doing  in  the  long 

Ms.  Alvarado.  In  the  long  term,  we're  going  to  stay  on  it  until 
we  feel  that  it's  moving 

Mrs.  Collins  of  Illinois.  Same  plan. 

Ms.  Alvarado.  Well,  with  changes  as  needed.  But,  yes,  we  think 
we've  been  getting  results. 

Mrs.  Collins  of  Illinois.  You  haven't  identified  those  changes 
as  yet? 

Ms.  Alvarado.  Have  we  identified  the  changes,  per  se?  Yes.  I 
think  that  if  you  take  a  look  at  the  Chicago  area  and  all  the  things 
that  have  developed  as  a  result  of  the  change  in  management,  I 
think  we're  taking  steps  in  the  right  direction.  We'd  be  happy  to 
share  the  plan  that  we  have  and  that  we've  been  getting  on  a  regu- 
lar basis,  as  the  board,  with  you. 

Mrs.  Collins  of  Illinois.  Mr.  Chairman,  if  she  can  provide  that 
for  me,  I  would  appreciate  it. 


Mr.  McHuGH.  The  entire  subcommittee  would  appreciate  review- 
ing the  information  asked  for  by  the  gentlelady.  I  thank  her  for  her 

Mrs.  Collins  of  Illinois.  Thank  you  very  much. 

[The  information  referred  to  follows:] 

Chicago  Performance  Cluster — Service  Improvement  Plan  FY  94-95 

Action  Responsibility                                   Milestone 

Ensure  Daily  Collection  of  the  5,167  Collection  Points; 

Implement  Red  and  Green  Collection  Card  Program  ...  Operations  Programs 11/94 

Establish  Collection  Management  System Operations  Programs 12/94-3/95 

Postmaster  Test  Collection  Program  Post  Office  Operations  2/95-Ongoing 

Maintain  Internal  EXFC/Shadow  Program Operations  Programs;  Post  Office  Oper-    6/94-Ongoing 

Establishment  of  Standard  Operating  Procedures: 

Establish  Proper  Workload  Management  Post  Office  Operations  6/94 

Winter  Action  Plan Post  Office  Operations  Ongoing 

Delivery  Unit  Operatmg  Procedures  Post  Office  Operations  Ongoing 

Executive  Accident  Review  Board  Human  Resources Ongoing 

Customer  Service/Plant  Agreement Core  Managers  1/95-Quarterly 

Create  Diversity  Action  Plan  Human  Resources 7/94-Ongoing 

Enhance  Operational  Performance: 

Sustain  Function  4  (Clerk)  Review  Schedule Operations  Programs Ongoing 

Perform  Distribution  Concept  Review  (Sort  Plan  Sys-  In-Plant  Support 9/94-9/95 


Conduct  Unit  Reviews  Operations  Programs Annually 

Perform  Formal  Route  Inspections Operations  Programs Ongoing 

Conduct  Continuous  Review  of  Operating  Plan  With  Operations  Programs Ongoing 

Processing  and  Distribution. 

Improve  Physical  Condition  of  Plants,  Stations  and  Core  Managers  Ongoing 

Branches  Work  Environment. 

Develop  Plant/Station  Contract Core  Managers  1/95-Quarterly 

Utilize  Service  Improvement  Task  Force  Core  Managers  6/94-6/95 

Retail  Enhancement: 

Establish  Lobby  Director  for  Each  Station Post  Office  Operations  9/94-2/95 

Maintain  Postal  Vending  Machines  for  Each  Station  ...  Post  Office  Operations  9/94-Ongoing 

Improve  Lobby  Appearance  at  All  Stations Post  Office  Operations  9/94-Ongoing 

Enhance  Ability  To  Wait  on  Customers  in  Five  Minutes  Post  Office  Operations  5/94-Ongoing 

or  Less. 
Proactive  Community  Involvement: 

Establish  50  Chicago  Postal  Customer  Advisory  Coun-  Customer  Service  Support 9/94-Ongoing 

cils  (CPAC). 

Enhance  Communications  With  Local  Political  Con-  Core  Managers  6/94 


Maintain  and  Expand  Local  Call  Center Customer  Service  Support 1/95-Quarterly 

Proactive  Communications: 

Round  Table/Focus  Meetings  for  All  Employees  Core  Managers;  Union  Reps 6/94-Prescribed  In- 

Conduct  Quarterly  Employees  Recognition  Program  Core  Managers  Quarterly 

Employee  Recognition: 

filentoring  Program  Established  for  All  Employees Core  Managers  11/94-Ongoing 

Annual  Employee  Appreciation  Day Core  Managers  Annually 

Establish  Annual  Employee  Unity  Day Core  Managers  9/94-Annually 


Initiate  Craft  Specific  Training  Teams  Post  Office  Operations  6/94-Ongoing 

Establish  Cluster  Computer  Training Information  Systems 6/94-Ongoing 

Initiate  "Violence  in  the  Workplace"  Training Information  Systems 6/94-Ongoing 

Develop  Comprehensive  Delivery  Development  Program  Human  Resources 1/95-4/95 

Provide  Expectations  Training  for  All  District  Employ-  Core  Managers  3/94-7/94 


Conduct  Mail  Processing  Back  to  Basic  Training  Human  Resources 5/94-Prescribed  In- 

Conduct  Leadership  Training;  Team  Building;  Increas-  Human  Resources 5/94-Prescribed  In- 

ing  Human  Effectiveness;  Total  Quality  Manage-  tervals 

ment;  Seven  Habits  of  Highly  Effective  People. 


Chicago  Performance  Cluster — Service  Improvement  Plan  FY  94-95 — Continued 

Action  Responsibility  Milestone 

Complement  Review  and  Reconciliation: 

Overtime  Reduction  Plan;  Maximize  Career  Coverage    Human  Resources 9/94-Ongoing 

at  Critical  Stations;  Attendance  Control  Program; 
Seasonal  Accident  Prevention  Program. 

Increase  Daily  Street  Management  Post  Office  Operations  1/95-Ongoing 

Manage  Growth  and  Expansion: 

Prepare  Preliminary  10  Year  Growth  Management  Plan    Core  Managers  3/95-Ongoing 

Integrated  Phase-in  Plan  for  New  Facilities In-Plant  Support Ongoing 

Mr.  McHuGH.  I  opened  up  that  line  of  questioning  because  I 
think,  obviously,  it's  important  and  instructive  that  the  relation- 
ship between  the  PMG  and  the  Governors  is  known,  that  hopefully 
there  is  a  sense  of  confidence  there. 

But  there  was  another  reason  as  well.  It  seems  to  me  that  while 
you  work  cooperatively  with  the  PMG  and  the  deputy,  as  the  Board 
of  Governors,  there  has  to  be  a  certain  dynamic  tension  between 
the  PMG  and  the  Governors,  yourselves.  Obviously,  you  are  the 
oversight  body,  the  board  of  directors,  if  you  will. 

I  understand,  in  past  years,  it  was  posed  to  your  predecessors 
that  you  require  expanded  staff  capabilities  to  do  your  functions, 
where  it's  necessary,  independently  from  the  PMG.  It's  also  my  un- 
derstanding those  past  requests  were  rejected. 

Has  this  board,  particularly,  as  I  mentioned  during  my  opening 
statement,  having  one  staff  person,  and  the  interrelationship  with 
the  PMG — and  I  think  some  of  the  Governors  here  today  very  accu- 
rately recounted  the  tremendous  workload  that  is  placed  upon  you 
for  what  is,  in  theory,  a  part-time  job,  in  theory  only — do  you  think 
that  perhaps  you  would  need  that  kind  of  staff  capability  now? 

Mr.  Winters.  We're  open  to  that.  There  has  been  a  reluctance 
on  the  boards  in  the  past  to  undertake  to  duplicate  the  expertise 
that  we  have  in  the  Postal  Service  itself  or  to  build  a  second  in- 
spection service.  An  inspection  service,  as  you  know,  has  an  audit- 
ing feature  to  it,  in  which  they  audit  the  Postal  Service.  There  are 
the  internal  auditors.  They  audit  the  contracts  that  we  make  with 
people  to  perform  services  and  sell  us  products. 

So  it's  difficult  to  know  where  to  move  in  that  regard.  We  also 
get  the  benefit  of  GAO  reports,  such  as  the  one  that  was  done  on 
automation,  more  than  one  done  on  automation.  So  there  has  been 
some  debate  within  the  Board  of  Governors  as  to  what  to  do. 

But  to  bring  it  up  to  date,  we  did,  decide  that  we  needed  to  add 
at  least  another  person.  And  I  didn't  think  we  would  be  able  to  find 
the  right  person.  We  need  to  have  somebody  who  has  a  broad,  inti- 
mate knowledge  of  the  Postal  Service  and  how  it  works  and  the 
people  involved,  and  there  are  not  many  of  those  out  there,  and 
someone  who  would  have  total  loyalty  to  the  Board  of  Governors. 

Fortunately,  we  did  find  one.  We  found  a  man  who  has  just  re- 
tired as  what  I  call  the  Chief  Auditor  in  the  Inspection  Service.  He 
was  head  of  the  Internal  Audit  and  has  retired.  He's  tired  of  play- 
ing golf  all  the  time,  and  he  wants  to  come  back  to  work.  And  we 
get  him  at  a  pretty  good  price,  because  it's  just  in  addition  to  his 
retirement.  So  he's  coming  on  board. 

His  name  is  Tom  Koerber,  and  he's  an  excellent  golfer,  I  under- 
stand. He'll  be  coming  on  board  the  latter  part  of  this  month.  He 


was  around  the  office  the  last  couple  of  days.  He  will  be  our  staff 
for  now.  We  also  will  add  other  staff  as  we  feel  it  is  appropriate, 
if  we  get  the  right  kind  of  people  that  we  want,  and  we  have  an- 
other person  or  two  in  mind  for  that. 

We  also  think  that  on  special  matters,  if  we  want  to  get  an  inde- 
pendent opinion  or  a  judgment  on  a  matter,  that  we  can  hire  some 
outside  consultants  on  it.  There  has  been  at  least  one,  and  maybe 
more,  people  who  have  contacted  me,  telling  me  they  have  exper- 
tise in  those  areas.  So  it's  something  we  might  utilize. 

What  we  have  done  in  other  things,  with  lawyers,  we  have  gone 
outside  of  our  own  lawyers  to  get  legal  opinions  on  certain  matters. 
So  we  have  done  that.  But  that's  where  we  are  on  staff. 

Mr.  McHuGH.  The  sound  you  hear,  the  fluttering  sound,  is  the 
preparation  of  resumes  behind  me  over  here.  I  was  glad  to  hear 
you'd  filled  that  post.  That's  interesting  news. 

Governor  Dyhrkopp. 

Mr.  Dyhrkopp.  Mr.  Chairman,  along  that  line,  and  just  like  Mrs. 
Collins  was  talking  about,  the  service  is  improving.  It's  improving 
in  Chicago,  because  I'm  in  Chicago  frequently.  And  I  know  it  on  a 
personal  basis,  not  only  do  we  read  the  reports,  and  we  know 
what's  going  on.  And  it's  going  to  get  better.  It's  not  where  it  ought 
to  be,  but  it's  going  to  get  better,  and  it's  going  to  get  better  all 
over  the  whole  country.  I  can  assure  you,  when  this  board  comes 
here  next  year,  we're  going  to  have  a  better  report  than  what  we 
have  now. 

A  couple  of  things  that  you  need  to  help  us  with  are  in  strength- 
ening the  Governors,  some  statute  changes  as  to  what  they  can  do, 
and  how  many  meetings  they  can  attend,  and  that  sort  of  thing. 
The  other  thing,  we  need  some  help,  definitely,  on  the  regulations 
that  we're  under,  the  Postal  Rate  Commission  regulations.  You 
need  to  do  that. 

If  you  really  want  to  level  the  playing  field  where  we  can  all  be 
competitive,  put  our  competitors  under  the  Postal  Rate  Commission 
also  and  let  them  have  to  go  through  that. 

Mr.  McHuGH.  We'll  write  that  down.  I  did  promise  we'll  listen 
to  all  ideas. 

We  could  go  on  forever,  but  I  truly  understand  the  value  of  all 
of  your  time.  Seeing  as  how  I  won't  be  challenged  on  the  motion 
I'm  about  to  make,  I  will  make  it. 

First  of  all,  let  me  say  a  couple  of  things.  Governor  Dyhrkopp 
mentioned  the  status  of  pay.  It  was  also  in  your  opening  remarks. 
Let  me  first  say  how  much  I  appreciate,  and  I  feel  very  confident 
I  speak  for  this  entire  subcommittee  when  I  say  we  all  appreciate 
the  effort  that  you  make.  You're  similar  to  school  board  members, 
whom  I  always  marvel  at,  because  they  take  all  the  responsibility, 
get  all  the  grief,  and  very  few,  if  any,  rewards. 

Certainly,  your  reward,  it  must  be  internal  and  in  your  hearts 
and  your  souls,  because  it's  not  in  your  pocketbook. 

Mr.  Winters.  I  hope  it's  in  heaven. 

Mr.  McHuGH.  I  appreciate  that.  It's  a  very  difficult  task  and  one 
on  which  you  obviously  spend  an  enormous  amount  of  time,  and  we 
appreciate  that.  This  subcommittee  would  be  interested  in  looking 
at  those  parts  of  the  statute  that  affect  your  ability  to  operate,  from 


top  to  bottom.  We  are  willing,  and  even  anxious,  to  discuss  those 
with  you. 

Let  me  also  underscore  what  you've  heard,  not  just  from  me,  but 
from  other  Members  as  they  have  come  in,  the  overriding  interest 
in  the  subcommittee  to  work  on  specific  suggestions  in  all  of  those 

areas.  ,     ,        .  ^u 

I  can  assure  you,  as  we  get  later  into  the  hearmg  process,  those 
folks  who  you,  Governor,  would  like  to  see  operating  under  the 
PRC  are  going  to  have  very  specific  ideas  of  how  the  statutes  may 
be  changed  that  you  may  not  feel  so  supportive  toward.  So,  in  fair- 
ness, we  want  to  have  all  of  these  kinds  of  initiatives  on  the  table, 
just  to  underscore  that  point. 

Let  me  again  thank  you  for  your  time.  Thank  you  for  your  serv- 
ice, particularly,  and  let  me  wish  you  all  the  very  best  as  you  go 
forward.  We're  looking  foward  to  working  to  with  you  toward  our 
common  goal,  and  I  do  feel  it  is  that. 

Let  me  note,  for  the  record,  that  all  Members  will  be  allowed  to 
enter  written  statements  and  comments  to  the  formal  entry.  Also, 
we  will  be  preparing  some  written  questions — and  we  will  invite 
the  other  Members  to  join  us  in  doing  so— that  we  will  be  submit- 
ting for  your  review,  consideration,  and  response.  We  would  appre- 
ciate it. 

With  that,  I  wish  you  all  the  best  and  adjourn  this  committee 
hearing  until  next  week  when  we'll  do  it  again.  Thank  you. 

Mr.  Winters.  Thank  you  very  much. 

[Whereupon,  at  11:45  a.m.,  the  subcommittee  was  adjourned, 
subject  to  the  call  of  the  Chair.] 



TUESDAY,  MAY  23,  1995 

House  of  Representatives, 
Subcommittee  on  the  Postal  Service, 
Committee  on  Government  Reform  and  Oversight, 

Washington,  DC. 

The  subcommittee  met,  pursuant  to  notice,  at  10:14  a.m.,  in  room 
311,  Cannon  House  Office  Building,  Hon.  John  M.  McHugh  (chair- 
man of  the  subcommittee)  presiding. 

Present:  Representatives  McHugh,  Owens,  and  Meek. 

Staff  present:  Dan  Blair,  staff  director;  Jane  Hatcherson,  Robert 
Taub,  Heea  Vazirani-Fales,  and  Steve  Williams,  professional  staff 
members;  Meryl  Cooper,  clerk;  and  Denise  Wilson,  minority  profes- 
sional staff. 

Mr.  McHugh.  Good  morning. 

Let  me  welcome  you  all  here  today  to  this,  which  represents  the 
fourth  of  a  scheduled  series  of  seven  general  oversight  hearings. 
The  purpose  behind  this  seemingly  lengthy  process  is  to  acquaint 
the  members  of  the  subcommittee  with  the  strengths  and  weak- 
nesses of  our  current  postal  system  so  that  we  might  be  able  to  bet- 
ter evaluate  any  proposed  changes  in  a  fair  and  well-informed 

So  this  morning  the  subcommittee  will  receive  testimony  from  a 
very  important  group  of  postal  consumers.  Commercial  mailers, 
publishers  and  nonprofit  mailers  generate  some  88  percent  of  the 
Postal  Service  mail  volume.  And,  in  return,  these  important  cus- 
tomers must  rely  on  the  Postal  Service  to  deliver  their  products  in 
a  safe  and  a  cost-effective  and  consistent  marmer.  Inadequate  serv- 
ice or  delivery  problems  directly  affect  these  customers'  bottom 
lines,  costing  dollars,  efficiency  and  market  positions. 

And  no  less  important  is  the  impact  these  businesses  have  on  the 
Nation's  economy  as  a  whole.  By  providing  jobs  for  millions  of 
Americans,  many  of  whom  are  located  in  our  small  towns  and  rural 
areas,  these  enterprises  are  a  vital  thread  in  America's  important 
economic  fabric. 

The  subcommittee  is  interested  in  how  business  mailers  assess 
the  current  postal  structure.  We  would  particularly  appreciate 
hearing  your  views  on  how  improvements  could  be  made  to  the  cur- 
rent structure  and  in  what  ways  quality  and  service  could  be  en- 

During  the  current  year,  the  Postal  Service  reports  increased  ef- 
ficiencies in  service.  This  past  week  in  Nashville,  before  the  Na- 
tional Postal  Forum,  the  Postmaster  General  touted  solid  financial 



performance  and  top  notch  service  as  evidence  the  system  has 
emerged  from  service  debacles  of  last  year.  The  subcommittee 
would  appreciate  your  views  as  to  whether  you  concur  with  this 
picture  as  painted  by  Mr.  Runyon,  or  whether  you  believe  addi- 
tional steps  are  needed  to  meet  the  demands  of  the  commercial 

Mr.  Runyon  also  told  participants  at  that  same  forum  that 
changes  are  needed  in  the  Postal  Reorganization  Act.  One  area  he 
specifically  mentioned  was  the  need  to  restructure  the  pricing 
mechanism,  thereby  enabling  the  Postal  Service  to  "plug  into  mar- 
ket-based prices."  The  subcommittee  is  also  interested,  therefore,  in 
hearing  your  views  concerning  the  nature  and  scope  of  such 
changes  and  the  impact  the  proposal  might  have  on  the  mailing  in- 

Last,  the  subcommittee  would  welcome  your  views  concerning